An Interactive Primer on the Macroeconomics of Financial Crises

Abstract

This learning package brings the macroeconomic implications of financial crises to the undergraduate classroom. It equips even apprentices of macroeconomics with tools enabling them to be active and constructive participants in discussions of the current crisis. It should also encourage undergraduate instructors to use the 2007 subprime crisis and its global effects as an extended case study, emphasizing the applied nature of macroeconomics and its potential to make developments and policy discussions in the real world more transparent. The package assumes familiarity with two workhorses of the undergraduate curriculum: the IS-LM and the Mundell-Fleming model. Extending textbook versions of these models, it shows how the emergence of financial crises, defined as deteriorations of confidence that lead to increasing risk premiums, affects money markets (via the LM curve) and capital markets (via the IS curve). Starting with an empirical comparison of key macroeconomic variables during the Great Depression of 1929-1933 and the current crisis, users then enter the interactive segment of the package. The Java applet that sits at the heart of this central section features a crisis version of the Mundell-Fleming model (to represent a small open economy) that is connected to a likewise modified IS-LM model (to represent the rest of the world). After being cautioned that financial crises come in many shapes (depending on the exchange rate sys-tem, on whether they erupt in the banking or corporate sector, at home or abroad) students may expe-riment with a variety of crises, experiencing their macroeconomic repercussions, and gaining hands-on experience as central bankers and government policy makers. This way students find out under what conditions financial crises threaten to generate major recessions, when textbook policy recom-mendations work or are turned upside down, and what kind of financial crises may even destabilize the economy with the prospect of an outright depression. [http://www.fgn.unisg.ch/eurmacro/xercises/crisis.html Link zum interaktiven Lernpaket / link to the interactive package]