Institutions, Macroeconomics, and the Global Economy

Course Number 1180

Professor Rafael Di Tella
Associate Professor Lakshmi Iyer
Winter; Q3Q4; 3 credits
28 Sessions
Exam

Course Overview

This is a course about exploiting the opportunities created by the emergence of a global economy and managing the risks that globalization entails. All managers now face a business environment where international and macroeconomic phenomena matter. Understanding the genesis of financial and currency crises, stock market booms and busts, and social and labor unrest is a crucial aspect in taking informed managerial decisions. Adverse macroeconomic phenomena can have a catastrophic impact on firm performance: witness the strong companies destroyed by the Mexican tequila crisis. Yet at the same time, such episodes also create business opportunities - and not just for the hedge funds and speculators that profit from them. Managers that have and use a coherent framework for analyzing these phenomena will enjoy a competitive advantage.

Career Focus

Internationally oriented careers; careers in global financial management.

Educational Objectives

The educational objectives of the IMaGE course are threefold.

First, the course aims to provide participants with a basic understanding of how contemporary macroeconomics explains dramatic events in the international economy, such as recurrent banking and financial crises in several countries. Much of this explanation focuses on the role of confidence, expectations and crowd psychology. These factors result in aggregate behavior - e.g., demand in the U.S. economy as a whole - behaving in a different manner than would be suggested by simply summing individual behavior. This, in turn, justifies the establishment of macroeconomics as a separate discipline, distinct from microeconomics with its focus on individual firm and household decisions.

Second, the course discusses how institutions can be developed which focus the uncoordinated actions of individual households and firms on good, rather than bad, overall outcomes. Such institutions are key determinants of macroeconomic outcomes. In some countries, legal, political, economic and social institutions are able to coordinate private decisions on stable and productive paths. Where institutional development is weak - as seems to be the case in much of the developing world - private actions are poorly coordinated and the result is greater macroeconomic volatility and slower growth. Understanding what constitute good institutions and how they can be designed to influence economic and business behavior in desirable directions is therefore crucial.

Finally, the course is intended to develop a simple framework linking institutional design and macroeconomic performance. This framework can be used to evaluate how globalization is likely to change the performance of specific markets and thus assess the associated risks and opportunities.

Course Content and Organization

Most of the cases and class discussions focus on the country level, although several cases look at specific sectors (e.g., the financial system in Argentina or the tax system in Slovakia) , or particular policies (inflation targeting in Brazil, capital controls in Chile). The course itself consists of three modules.

The first module ("Macroeconomic and Financial Dynamics") uses the experiences of two famous economic policy makers (Alan Greenspan and John Maynard Keynes) and several countries which have suffered through tremendous economic dislocation (Argentina, Uganda, Peru) to identify and develop the issues of communication, confidence, coordination and institutional development that are central to the remainder of the course.

The second module ("Creating macroeconomic institutions") uses the European experience to illustrate how different countries have developed institutions that permit coordination of individual business decisions on good aggregate economic outcomes. Moreover, it demonstrates how changes in the environment can render previously successful institutional structures outmoded, thereby creating both opportunities and risks for firms and households.

The third module ("Globalization meets national institutions") discusses how the increasing integration of the global capital markets can affect the economic performance of previously successful nations by acting to undermine the internal coherence of the institutional structures on which their economic performance rested and the policy options available to countries.