Session 2 podcast:
Milton Friedman podcast
Federal Reserve Study
The position paper is this:
You are a chief economic adviser to the most important policymakers and business people in your small-sized country. The
macroeconomic features of your country are as follows. There is rampant (serious) deflation. The currency's value has been
appreciating for several years. Unemployment is rather high and growing. Government debt is growing, both in the domestic
currency and in dollars. Corporate debt, mainly bonds sold to foreigners in euro denominations, is very high. Consumer debt
is very low. And the country's banks are mainly owned by larger countries' banks who are repatriating profits due to weaknesses
in their own banks' balance sheets.
The problem: corporations have begun defaulting on their bonds, destabilizing the financial system, causing creditors,
both domestic and foreign, to demand repayment of debt; further, there are rumors that the state is about to default on some
of its dollar-denominated sovereign debt obligations.
This situation is now spreading panic into the domestic and international bond markets where bond prices have fallen very
rapidly (and yields have increased very rapidly). The stock market is also falling, apparently due to the collapsing bond
market, and this is leading firms to cut employment levels to prepare for bad economic times. Prices are falling because businesses
cannot borrow at favorable terms any longer and so are cutting investment, while consumers will not borrow at the current
level of interest rates and are afraid to borrow as well.
The position paper: You have been asked to write a fifteen page paper offering no fewer than 10 policy actions/ideas that
the policymakers and business people can try in the economic environment defined above. The goal? To stabilize the economic
situation in your country. For each recommendation, you should explain what the problem you are addressing is (e.g., to raise
the value of the currency) and how your policy idea will help solve that problem.
Resources for the position paper (besides class discussions, your own experience and previously assigned readings):
Resource 0: Primary research material site for position paper
Resource 1 for project
Resource 2 for the project
Resource 3 for the project
resource 5 for the project
resource 6 for project
resource 7 for project
resource 8 for project
Resource 9 for project is textbook reading pp. 391-399