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Columbia Business School
B8250: The Global Economic Environment II: Business
Cycles and Financial Markets
Spring 2014
Professor Andreas I. Mueller
(212) 854-0248
[email protected]
Uris Hall 824
Office Hours: Wednesdays 9:30 – 11.00 am or by appointment
General Course Information
Course Description
This course is a sequel to the core course Global Economic Environment. Building on the fundamentals
introduced in that course, we develop a conceptual framework to explain business cycle fluctuations and
their implications for financial markets.
We examine in particular the determinants of key economic variables such as real output, inflation,
employment, interest rates, exchange rates, and their complex interactions in today’s global economy. We
examine the determinants and implications of budget deficits, as well as the conduct and implementation
of monetary policy, in the U.S. and in other market economies around the world. Special attention is given
to the interactions between macroeconomic forces and financial markets.
Since an important goal of this course is for students to become informed and sophisticated consumers of
economic news, the issues discussed in this course draw heavily from current events and real-world
examples.
GEE II is a co-requisite for the course "Financial Markets And The Economy: Global Economic Environment
III" (B8251).
Course Objectives
To acquire a solid theoretical and applied understanding of the macroeconomy and its relationship to
financial markets and the economic environment in which firms operate. To develop a critical and
sophisticated view of economic policy questions.
Teaching Assistants
TBA
Course Materials
Recommended reading: Parts 4 and 6 of Macroeconomics: Policy and Practice, by Frederic S.
Mishkin, Addison-Wesley Longman Publishing, 2010. The book is available at the Columbia University
Bookstore (and numerous other sources). Multiple copies of the textbook are on reserve at the Watson
library in Uris hall.
Handouts: Various handouts will be distributed throughout the semester to supplement the material
covered in the book. These include class notes, supplemental readings, and newspaper articles.
In addition, you are encouraged to read the economics pages of at least one of the following publications
on a regular basis:
The
The
The
The
Economist
Wall Street Journal
Financial Times
New York Times
Course Requirements and Grading
Lectures
There will be 12 classes. See the calendar on Canvas for the schedule.
Friday Review Sessions
Time: TBA
Location: TBA
Optional review sessions will be held on Fridays starting on Friday February 7. I will personally hold a
review session to review the model, on Friday February 7. No new material will be presented in this
session; it will simply serve to review important material covered in class. I will also hold the final review
session on Friday March 7. This last review session, just before the final exam, will constitute an overall
review of the material covered in the course. Both review sessions will be videotaped and available to
students on Canvas. The TA’s will hold the remaining review sessions. During these sessions, the TAs will
review key concepts seen in class and go over some of the homework problems. They will also be
available to answer your questions.
Student debates
Over the course of the term, there will be four student debates (assignment type A). Each debate will
take place in class and will last 20 minutes. It will involve two student teams who are asked to take a pro
or con position on a topic related to the course. Each group will present its position in 5 minutes, followed
by a 7 minute class discussion and a 3-minute wrap-up. The students have been assigned to groups. The
schedule, groups, a list of topics, as well as background material and guidelines for the preparation of the
presentation can be found on Canvas.
Cases
There are two case assignments, which consist of questions to be written up and handed in as well as
questions to be prepared for general class discussion. These will be done in groups of up to six
students (assignment type A). Only one write-up per group needs to be handed in at the beginning of
the lecture. Late cases will not be accepted. All group members should be prepared to discuss the answers
in class.
Problem sets
With the goal of providing you with a better understanding and a greater appreciation of the concepts and
tools covered in this course, I will assign two problem sets. These will constitute a useful preparation for
the exam. They will be collected in class on the date indicated and answers will be posted on Canvas soon
after. You may consult with your classmates for these problem sets, but each student should hand in his
or her own independently written answers (assignment type B). No answers to problem sets should be
exchanged physically or electronically. Late problem sets will not be accepted.
Exams
There will be a final examination. The final exam will take place on Tuesday March 11, 2013, from
2:00pm-4:30pm (check Canvas for rooms). This exam will be closed book, however two double-sided (8
½"-11") "cheat-sheets" will be allowed. These may contain any notes you choose to write on them. Final
exams will not be returned, but will be available for reviewing after the end of the semester.
Regrade policy: All requests for fixing grading errors must be submitted to me in writing within one week
after the grades are posted, and must be very specific. If you ask to fix a grading error, we have the
option to regrade your entire exam.
Grading




Final exam: 60%
Problem sets and cases: 20%
Student debates: 10%
Class participation: 10%
Class Schedule
Class#
1
Date
Course Topic
January 28, Introduction to business cycles
2014



2

3
February 4,
2014
The production function and the FE
curve (Ch 11, pp. 273-274, 277-278)
The Aggregate Demand (AD) curve:
The IS curve (Ch 9) and the Taylor
Principle (Ch 10, pp. 240-250)
The AD/AS Framework: Part II


(prior to
class)
MI 8
(pp. 200-213)
Course introduction
Business cycle facts: Output, inflation,
interest rates and unemployment (Ch
8, pp. 200-213)
Macro Forecasting
January 30, The AD/AS Framework
2014

Read
Shocks to Aggregate Demand (Ch 12,
pp. 284-286)
The Aggregate Supply (AS) curve (Ch
11, pp. 267-273): Okun’s Law and the
Phillips Curve
MI 9
MI 10
(pp. 240-250)
MI 11
(pp. 273-274,
277-278)
MI 11
(pp. 267-273)
MI 12
(pp. 284-286)
Assignment
Due
4
February 6,
2014
MI 10
The Phillips Curve




The Great Inflation of the 1970’s (Ch
13, pp. 334-338)
The Expectations Augmented Phillips
Curve (Ch 11, pp. 273-280)
The Money Market (Ch 10, pp. 251-256)
Student presentation 1: Will the
U.S. unemployment rate be below
6.5% by the end of 2015?
Review February 7, Review session on AD/AS
Session 2014
5
February 11, The Phillips Curve: Part II
2014



6

7


8
MI 13
(pp. 334-338)
Student Debate 2
Inflation expectations and the AS curve
The Volcker Disinflation (Ch 12, pp. 293294)
Student presentation 2: Will
Industrialized Economies Default on
their Debt?
Sources of Business Cycles:
Demand and Supply Shocks (Ch 12)
Monetary and Fiscal Policy as
Stabilization Tools (Ch 13, pp. 314-327;
MI 16, pp. 407-413)
MI 12
PS #1
MI 13
(pp. 314-327)
MI 16
(pp. 407-413)
MI 8
Student Debate 3
(pp. 213-217)
The Keynesian vs. the Classical View
(Ch 8, pp. 213-217)
The Modern Consensus View
Student presentation 3: Should the
Fed commit to low interest rates until
the unemployment rate is below 6.5%?
MI 13
February 20, Monetary Policy in Action
2014
(pp. 312-314,
327-332)


Structure of Central Banks
Monetary Policy Objectives (MI 13,

Conventional Monetary Policy (MI 13,
pp. 327-332)
Challenges and Limitations of Policy
Case 1: Monetary policy in action: The
FOMC meeting of 1992


(pp. 273-280)
(pp. 293-294)
February 18, Debates about Macroeconomic
2014
Stabilization Policy

MI 11
MI 12
February 13, Sources of Business Cycle
2014
Fluctuations and Economic Policy

Student Debate 1
(pp. 251-256)
312-314)
pp.
Case 1: Monetary
policy in action
9
February 25, Asset Prices and Macroeconomics
2014


10
February 27, Exchange rates regimes; Debts
2014
and deficits





11
March 4,
2014
March 6,
2014
Review March 7,
Session 2014
March 11,
2014
Notes:
MI 17
(pp. 423-440,
443-449)
PS #2
Student Debate 4
Exchange rates and Open Economy
AD/AS (Ch 17, pp. 423-440)
Fixed vs. flexible exchange-rate
regimes (Ch 17, pp. 443-449)
The EMS crisis
The fiscal outlook
Student presentation 4: Should
Greece leave the EMU?"
Financial markets and
macroeconomic news

12
The Yield Curve
The Response of Bond and Stock Prices
to Macroeconomic Shocks
Case 2: The Big News
Course synthesis
Overall review of the course
FINAL EXAM
MI: Macreconomics: Policy and Practice,
by Frederic S. Mishkin, Addison-Wesley
Longman Publishing, 2010.
Case 2: The Big
News