The Class: Macroeconomics
The United States has just recovered from the deepest and longest recession since the Great Depression. The European economy is still in deep trouble due to the euro crisis and, in particular, the Greek sovereign debt crisis. China’s growth is slowing, and the Chinese stock market just went through a meltdown this past fall. The main objective of my class is to give students the basic analytical tools to understand these types of macroeconomic events. I also want them to be familiar with phenomena such as growth, unemployment, and inflation, as well as with the impact of monetary and fiscal policy.
Why do some countries grow faster than others? What determines economic fluctuations? How does being part of a global economic system affect the economy of a country? The challenge is to provide students with a unified framework to answer these questions and to critically assess the pros and cons of a variety of economic policies.
This framework is a simplified version of the model that policy makers and central bankers use to make decisions. We build it step by step in the first six classes, and then we put it all together to talk about examples both from the past and from recent events. On top of that, I bring in news articles relating to what we’re going to talk about that day, and I encourage students to as well, so they can connect the dots from the model to the real world. Every week I update my class notes with what’s in the news. It’s more work, but I think it’s also more interesting for the students—and for me.
The first year I started teaching, in 2006, people were maybe a little suspicious about how important it was for them to understand the behavior of the macroeconomy. They may have never cared directly about what happened to interest rates, for example, given that monetary policy until 2006 was pretty stable. Then in 2007, suddenly people realized that it’s important to know what’s going on, and to be prepared.
When the financial crisis happened, most of our real-world examples in class addressed it. Students found it exciting to try to understand what was really going on, because many economists didn’t know at the time either. The debate became very lively. I learned from the students as well, because many of them were working in the financial markets and they saw the crisis from the inside. I was teaching them about the impact of the crisis on the macroeconomy, and they helped me understand some of the institutional details.
The Case Study
The US housing crisis is related to my research, and I like to talk about it in class when we compare representative-agent models with heterogeneous-agent models. If you look at the United States, assets on average are much bigger than liabilities, so you would tend to say that every household is the same, as in a representative-agent model—everybody might have some debt, but they have more assets. Instead, when you go deeper into the data, you see that the assets are all in the hands of some and the liabilities are in the hands of others. When there exists a large fraction of households that are highly levered, it makes the economy much more sensitive, and a heterogeneous-agent model can help us understand that. Household debt increased dramatically between 2000 and 2005 and was very high when the crisis hit. I think that was the defining feature of the recession.
I want them to develop their own critical viewpoints so they can think through the models that we developed in class and understand the pros and cons of policy proposals.
Once per section, I divide the students into teams and have them research and present proposals before the rest of the class, followed by a debate and a vote. Last year when I was teaching, players in the Greek crisis were going through multiple rounds of negotiations. Since it was the most interesting macro debate at the moment, I organized our class simulation around it.
Students self-selected onto one of four teams: Greece, Germany, the International Monetary Fund, or the European Central Bank. Each team made a proposal for their institution’s renegotiation of a bailout agreement, structuring it based on what they learned in class and giving rational reasons for their decisions. The vote revealed that some students changed their minds as a result of the debate, which is always nice to see because it shows that the discussion is useful.
Most students are interested in macro topics because they want to understand what’s happening around them, both for their personal interests and for their businesses. In many types of jobs, it’s important to understand what the economic outlook is where you operate—to make the best calculation you can to maximize profits if you are a firm, to give the best advice as a consultant, or to make the best investments if you work in finance.
I would be happy if the average student who comes out of my class can read the Economist, or the Wall Street Journal or the Financial Times, and really understand what the articles on economics are talking about. I want them to develop their own critical viewpoints so they can think through the models that we developed in class and understand the pros and cons of policy proposals, actively participate in debates, or create their own forecasts about what they think is going to happen in the economy.
From the Students
Luca Pizzuto: Before Booth, my background in mechanical engineering often left me puzzled when I read articles on macroeconomic issues in the news. I took Professor Guerrieri’s class not only to better understand the issues, but because I firmly believe a good understanding of macroeconomics is essential for the wide set of business decisions that I expect to face throughout my career. On one hand, Macroeconomics provided me with all the tools I needed to understand the Greek debt crisis, the Federal Reserve’s interest-rate decision, and Europe’s quantitative easing. On the other hand, it’s helping me think about international investment decisions with a more lucid perspective.
Maor Kleider, ’15: As an engineer coming from an R&D background, I had minimal exposure to macroeconomics. I took the class in order to learn more about the global economy and the different forces, incentives, and stakeholders that make it dynamic and uncertain. I particularly liked the in-class exercise when we discussed the European Union’s approach to the Greek debt crisis. Professor Guerrieri didn’t give us answers, but rather made sure to help us develop our own opinions and discuss them in class, bringing our unique experiences. Upon graduation, I joined Seattle-based Amazon as a product manager for the cloud and big-data services, leveraging the class to better understand dynamics at the global level.
—As told to LeeAnn Shelton