Category Archives: pedagogy

Dynamic AD-AS model

I am a big fan of the Cowen/Tabarrok Dynamic AD-AS model. This page contains resources for my students who want more information.

Here is a video:

 

Here is a presentation:

You can download the slides here.

I published a short blog post called “The policymakers view of the great recession – a dynamic AD-AS analysis.”, and an academic article called “A Dynamic AD-AS Analysis of the UK Economy, 2002-2010“.


There are three components to the dynamic AD-AS model.

The first is the Solow curve, which shows the growth rate that would exist (i) if prices were perfectly flexible; (ii) given the existing real factors of production. It can be derived from the Solow growth model and since this treats capacity as being independent of inflation, it is depicted as a vertical line. Improvements in research & development; better infrastructure; increased competitiveness; higher quality education and training; labour market flexibility; or natural events such as more conducive weather would all constitute a positive productivity (or “real” or “supply side”) shock, increase the Solow growth rate, and shift the Solow curve outwards.

The second component is the Aggregate Demand (AD) curve. This can be defined as combinations of inflation and real growth for a specified rate of total spending, and is far more intuitive than the traditional AD curve. This is because instead of being based on other curves (necessitating an explanation of the Pigou effect, for example) it is instead based on a dynamic version of the equation of exchange:

M+V=P+Y

M denotes the growth rate of the money supply, V denotes velocity growth, P denotes inflation and Y denotes real GDP growth. Since the AD curve simply shows how any given amount of (M+V) can be split between P and Y, it will only shift if there is a change in M (i.e. the money supply) or V (confidence).* In terms of what constitutes a velocity shock, we can switch from looking at the left hand side of the equation (our posited increase in total spending) to the right hand side of the equation (how it is being spent). After all an increase in spending must be spent on something. The composition of total spending is household spending, business spending, and government spending (we’re assuming a closed economy).

AD=C+I+G

Potential sources of increased spending are thus fiscal policy (either changes to government spending or changes to taxes) or wealth effects (where “wealth” means the value we place on the assets we own). An important caveat is that generally speaking changes in the growth rate of V tend to be temporary and thus only changes in M can generate sustained inflation.**

If prices were perfectly flexible, the Solow curve and AD curve would suffice. For example, if the Solow growth rate were 3% and the central bank increased M from 5% to 10% this would lead to an equivalent increase in inflation (from 2% to 7%).

However if prices aren’t perfectly flexible, the dynamic AD-AS model shows how the economy can deviate from potential GDP growth. This requires the third component, the Short Run Aggregate Supply curve (SRAS). The SRAS shows the relationship between P and Y for a given expected inflation rate. As with the traditional AD-AS model, the labour market plays a key role in economic adjustments, and so “sticky” wages (i.e. those that don’t adjust quickly to new conditions) are problematic. For example, if revenues are rising at a faster rate than wages (which constitute a large share of the firms costs), firms will appear to be profitable and will expand their output. Similarly, if prices fall quicker than wages, production will appear to be unprofitable, and they will reduce output. It is due to inflation expectations that we might expect wages to lag behind prices – if inflation is higher than expected output will rise. If inflation is lower than expected output will fall. This explains the upward sloping shape of the SRAS curve.

Underpinning the SRAS is the concept of the signal extraction problem, which implies that in the short run (i.e. whilst prices are adjusting) there may be a positive relationship between inflation and real growth. (This is the conventional argument that money is only neutral once prices have adjusted. One of the nice things about moving away from a “short run” vs. “long run” distinction is that it’s less likely that students fall into the trap of treating these concepts as passages of time. To say that prices are “sticky” is not really to say that it takes time for them to adjust, but that there are costs involved in doing so).

The reason the SRAS curve is flatter below Y* is because wages are especially sticky in a downwards direction. Basic money illusion means that workers tend to be hostile to nominal wage cuts. And the SRAS curve is steeper above Y* because there’s a limit to how fast the economy can grow – it can’t indefinitely exceed the Solow growth rate.*** Given that the SRAS holds for a given rate of inflation expectations, the only thing that can cause it to shift is a change in those inflation expectations. This may appear to underplay the importance of the SRAS curve, but in fact it clarifies the difference between SRAS and the Solow curve. It is tempting to think of the difference in terms of calendar time, for example that a period of bad weather, causing a poor harvest, will primarily affect the SRAS. This is because it is a temporary event that hasn’t altered the underlying production capacity, and if there is nothing to say that bad weather will cause a reduction in supply in the long run, it shouldn’t affect the long run supply curve. However the dynamic AD-AS model makes it a lot clearer to understand why the above reasoning is incorrect. An adverse weather event – even a temporary one – is a real shock, and will therefore impact the Solow curve and not the SRAS. The SRAS shows how the price mechanism facilitates but also can disrupt the adjustments in response to either real (Y*) or nominal (AD) shocks. It can be somewhat complicated (and sometimes arbitrary) to distinguish between SRAS and LRAS shocks in the traditional model. The dynamic model treats all real shocks as Solow shocks and is therefore much easier to use.


It is tempting to treat M as monetary policy and V as fiscal policy but this wouldn’t be correct. Most central banks use interest rates (specifically a short term risk free rate) as their main policy tool. If the “velocity of circulation” refers to the speed at which money turns over, then this is a function of people’s demand to hold money (relative to their demand to hold goods and services). In other words V is the inverse of the demand for money. If the demand for money is high, people hold onto cash, and velocity is therefore low. Hence central banks can either affect the money supply, or try to influence the demand for money by manipulating the price (i.e. interest rates). This actually helps aid a discussion about quantitative easing. Given that interest rates are very low many central banks have reinstated the quantity of money (through the process of quantitative easing) as a policy tool that can be used in addition to interest rates.

** An increase in C in the dynamic model implies an increase in the growth rate of C, relative to I and G. Indeed this demonstrates a weakness in fiscal stimuli because it is impossible for a permanent increase in the growth rate of G. At some point it is likely that an increase in G that leads to a positive AD shock will at some point reverse itself. Indeed this also implies that when a central bank reduces interest rates this will also be self-reversing. As Cowen and Tabarrok point out (p.257) this reinforces the notion that changes in the growth rate of C, I or G do not change the rate of inflation in the long run. Given that shifts in V will tend to be temporary it is.

*** The above could also be considered a “Lucas” curve, since it follows his islands parable and emphasises the labour market. We might also think of it as a “Hayek” curve if we focus more on the capital market. Entrepreneurs confuse a temporary reduction in real interest rates (due to an increase in the money supply) with a permanent one (or at least one consistent with an increase in real savings) and invest in capital-intensive production plans. The Austrian claim is that this will be self-reversing and bring on a recession. We can incorporate this into the analysis here by stressing that particular increases in AD (i.e. when money supply exceeds the demand to hold it) will – as Cowen and Tabarrok argue happens ordinarily – cause a reverse shift in AD later on, but also end up causing a reduction in Y* through a negative shift in the Solow curve. Monetarists would say an increase in AD ultimately leads to an increase in P. Austrians would say that it increases P and reduces Y*.

Thesis supervision

This page provides information for students that are considering asking me to supervise their dissertation. It provides some ideas on possible topics and advice on methodology.

I think there are three ingredients for success:

thesis

(1) Choose an insightful research question in an interesting topic

You can see an overview of my research interests here. In addition the + questions from the Markets for Managers problem set could be a source of inspiration.

I consider the power of economic reasoning to stem from its applicability, and therefore take a broad and eclectic position of what would constitute suitable subject material. For a general management thesis I don’t require students to work on the same research topics that I do. Indeed, there are several topics that I have thoughts and ideas on which I’d be delighted to see students run with. It is important to stress that an interesting topic is a necessary but not sufficient condition. You also need to identify an interesting research question within that topic. I’ve provided some examples of topics that I find interesting below:

(2) Utilise the right methodological framework

To start off with, I recommend the following articles on research design:

Although I’ve created an online course on Analytics my methodological interests are in qualitative and comparative methods.

There are also a few techniques that I am willing to work with students interested in using, regardless of the topic:

If you use standard quantitative methods then be aware of publication bias and avoid p hacking. For more listen to:

(3) Demonstrate competent project planning

This is crucial because it determines whether the experience is enjoyable or not. The following are necessary (but not sufficient) characteristics you need to have:

  • Enthusiasm for the research question (and not just the research topic)
  • Genuine desire to have research published
  • Ability to self-motivate
  • Swift communication

When planning the writing of the thesis take a look at:

This is also useful: Baylor University research planner guide.

If you get to present your work, here’s a good guide for creating a poster (and here). Don’t forget to include a clear plastic wallet with printed copies, and one for business cards.

Grading

These are only general guidelines and there’ll always be a gap between my judgement and your understanding of my judgment. But just because the grading is subjective does not make it arbitrary. I will assign an A, B, C or D grade to the following dimensions:

  • Purpose – are the aims and objectives clearly set and have they been met?
  • Originality – is this new? Interesting?
  • Focus – is the work precise?
  • Literature review – is the thesis aware of and able to critically discuss existing literature?
  • Methodology – are the methods chosen appropriate?
  • Analysis – has the entire process been transparent and correctly interpreted?
  • Implications for management – does it have relevance to the professional community?
  • Quality of presentation – is it clear and does it add value to the written work?
  • Quality of written work – are there any errors?
  • Quality of communication with supervisor – were the expectations of the supervisor managed effectively? Was help asked for when necessary? Was it an enjoyable experience for all?

For more details on grade ranges see page 7 of my guide for students, however you should adjust the passing grades such that what I deem to be a C grade for a thesis would get a mark of 55-60; a B is 70-80 and an A is 85+. Don’t make me send you this.

Finally, if you’re interested in a career in academic economics, here is some career advice and here is advice on surviving grad school.

Previous students:

  • Karoline Holm, “The Norwegian Gender Equality Paradox: Why do gender equality-winner Norway have such low percentage of female leaders in the business sector?” June 2017
  • Emilie Gueissaz, “Marketing ploy or source of competitive advantage? A case study of circular
  • economy practices in urban hotels in Europe” May 2017
  • Francesca Celano, “Economic Freedom and Human Development: An analysis of the links between economic policy and quality of life” June 2016
  • Valentin Vermersch “Features of Successful Strategies by Firms from Developing Economies”, June 2014
  • Bartosz Wasilewski “Analysis and Evaluation of the Credit Rating Industry”, July 2007

A Short Introduction to Macroeconomic Policy

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Introduction

This short course provides an overview of the ways in which governments try to influence the economy. It will provide an explanation of what monetary and fiscal policy are, and why they are used. We will assess the ECB’s response to the financial crisis and the 2009 Obama stimulus bill. Emphasis will be on providing a framework for participants to refine their own opinions.

Prerequisites

The course does not rely on any previous study of economics. However, a familiarity with economic terms (such as “inflation”, “GDP”, “balance sheet”), and an awareness of contemporary policy debates (such as zero lower bound monetary policy), will be useful. The course is aimed at people who watch Newsnight but don’t quite feel they understand the economic foundations of what’s being said.

Teaching methods

  • Lectures (2 sessions)
  • Case discussion (1 session)
  • Workshop (1 session)

Textbook

The only mandatory readings are provided in the schedule below. However the course is designed to tie into the following (amazing) textbook:

The website for the book contains an array of other resources: http://econ.anthonyjevans.com/books/markets-for-managers/

An additional reading list is available here: http://econ.anthonyjevans.com/2010/03/course-readings/

An edited list of highly recommended articles from The Economist is here: http://econ.anthonyjevans.com/2011/05/the-economist-an-mba-reader/


Schedule 

9:00am  Breakfast

9:15am  Welcome address

9:30am Session 1: Monetary policy: A Beginner’s Guide to Central Banking*

Video: “An introduction to the Dynamic AD-AS model

11:15am Break

11:30am Session 2: The Euro in crisis

“The Euro in Crisis: Decision Time at the European Central Bank” Harvard Business School case no. 9-711-049 (£)

Questions: 

1. How does the ECB conduct monetary policy?

2. What actions were taken after the BNP Paribas freeze?

3. How do these actions compare to the Federal Reserve?

1:00pm Lunch

2:00pm Session 3: Fiscal policy: The Confidence Multiplier*

3:30pm Break

3:45pm Session 4: Workshop

Market for Managers Problem Set

Questions: 7.1, 7.2, 8.1, 8.2, 8.3, 8.4, 8.5, 8.6, 8.7, 8.8, 8.9, 9.1, 9.2, 9.4

4:45pm Debrief

5:00pm Finish

Note: Sessions marked with an asterix (*) have a lecture handout available in advance. Cases marked with a pound sign (£) will be distributed in advance.


Extensions

The course does not cover the following: international economics, business cycle theory, growth theory, supply-side economics.

Numeracy Skills Bootcamp

bertrand-russell
In 2008 I was asked to provide a short, intensive bootcamp for incoming students. This page is a collection of the resources that I used for that course. It contains some slides that define and explain key concepts, and also provides some examples of numeracy tests. In addition, I noticed that many students – particularly females – felt that they “weren’t math people”. I’ve done a video to discuss these fears. I hope you find these resources helpful.

I also recommend the following page, which is full of links:


Part 1. Fundamentals of Mathematics

 

 Download the handouts here.

  • Socrative Quiz: Fundamentals of Mathematics

Additional topics:

Some fascinating ideas:

fermat


Part 2. Practice Tests

Download the handouts here.

 

 

 

 

 

Additional resources:


Part 3. Gender Differences & Mathematics


Download the handouts here.

Further reading:

And remember:

comics-abstraction


This is part of my online course on Analytics.

An Introduction to Game Theory

“Game Theory”, or the science of strategy, is a big topic that leads in many fascinating directions. This post will provide a basic understanding of what Game Theory is, and how it can be utilised in management situations. In addition to providing my own course material, I have also attempted to tie into some of the amazing resources that already exist.

My advice for you is to watch this video, and then choose one (or more) of the additional readings.

The handouts for my lecture slides are here (note there is some additional content compared to the version in the video). If you are an instructor then email me and I’ll send you the raw powerpoint file (containing surprises and solutions). I like to follow a lecture on Game Theory with the following classroom exercise:

  • Beckman, S. R., “Cournot and Bertrand games” Journal of Economic Education, Vol.34, No.1, pp.27-35 (see here for the handouts, email me for a Teaching Note).
  • I also utilise the following at the start and end of the Game Theory lecture: Oligopoly Game 42 and “Cheating for a $20” (email me for the Teaching Note)

Here is my attempt to introduce some Game Theory into the classroom.

Additional readings

Here are some recommendations, depending on your level of interest and time constraints:

But the Game Theorist’s “bible” is Thinking Strategically” by Dixit, A., and Nalebuff, B (Norton, 1993). This is the one book you need to read, re-read, and master.

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Finally, it is great fun to apply Game Theory to popular culture. See Michael Statsny’s discussion of game theory in movies, and a collection of popular cultural references. Here are some of my favourite discussion questions:

I also like these two classic clips from Goldenballs:


This is part of my online course on Analytics.

Faculty Audits

Professional educators understand the limitations of student evaluations, and yet the culture of external assessment is attempting to incorporate a similar thirst for trivial feedback on our peer-review. As someone who enjoys sharing a classroom with colleagues, and is genuinely keen to share ideas on effective pedagogy, I wanted to outline a possible way to conduct teaching feedback. I will write it from the perspective of the instructor conducting the audit.

  1. Acquire the course outline and read it as closely as you expect students to read your outline.
  2. Meet with your colleague to discuss the audit. Get a good understanding of where the session you will be observing fits into the course as a whole. Make sure you’re aware of any specific areas that they would like feedback on.
  3. Attend the whole class. Arrive early and leave at the end. Alternate roles between being a student and an observer. It might be a good idea to talk to students about any specific questions you have, but even if you think this would be a good idea ensure that the person you are observing is ok with that.
  4. Write a letter to the person you observed, thanking them, and providing your reflections. If there are specific areas of weakness that you believe you’ve identified keep this document private. By all means copy in Programme Management (with prior agreement) but address it to your colleague.
  5. Take your colleague out to lunch, go over the feedback, and give them an opportunity to respond. Agree on what parts you should share with other colleagues, and external examiners. The written feedback it should be tailored to the specific course objectives that you’ve ascertained from step 1 and 2.

Here are 12 tips for peer observation:

Here is a copy of the feedback form I routinely give to students to assess my own performance:

Textbooks

mankiw

This is just a list of textbooks that I’ve taught from, and like:

Principles:

  • Mankiw, N.G., and Taylor, M. P., 2011, “Economics“, (Cengage Learning, 2nd edition)
  • Cowen, T. and Tabarrok, A., 2012, “Modern Principles of Economics” (Worth, 2nd edition)
  • Heyne, P., Boettke, P and Prychitko, D., 2013, “The Economic Way of Thinking” (Prentice-Hall, 13th edition)
  • Begg, D., Fischer, S., and Dornbusch, R., 2008, “Economics“, (McGraw Hill, 9th Edition)

Advanced:

Managerial:

And don’t forget: Markets for Managers!

Markets for Managers: A Case Method Seminar

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This proposed two-day seminar is aimed at junior faculty teaching on general management programs. It shows attendees how to teach using the case method, and provides content for market-focused courses. If satisfactory progress is made attendees will then become licensed to utilise the classroom material in their own courses, and have access to ongoing support and follow up workshops.


Schedule

Day 1

Introduction to participant-centred learning

  • 9:00am – 10:30am | Session 1: A negotiation exercise
    • Malhotra, Deepak, “Hamilton Real Estate”, Harvard Business School Case Nos. 9-905-052 and 9-905-053
  • 11:00am – 12:30pm | Session 2: A classroom simulation
    • Holt, Charles A., and Sherman, R., (1999) “A Market for Lemons”, Journal of Economic Perspectives

The Case Method

  • 2:00pm – 3:30pm | Session 3: Competitiveness
    • Sölvell, Ö and Porter, M,  ”Finland and Nokia”, Harvard Business School case no. 9‐702‐427
  • 4:00pm – 5:30pm | Session 4: Public Finance
    • “Rovna Dan: The Flat Tax in Slovakia”, Harvard Business School case no. 9-707-043, March 2010

Day 2

Create your own teaching notes

  • 9:00am – 10:30am | Session 5: Prediction markets
    • Coles, Peter, Lakhani, Karim and McAfee, Andrew, “Prediction Markets at Google” Harvard Business School Case No. 9-607-088, August 20, 2007
  • 11:00am – 12:30pm | Session 6: Market-Based Management (R)
    • Weston, Hilary A., “Automation Consulting Services”, Harvard Business School Case No. 9-190-053, November 2000

Create your own cases

  • 2:00pm – 3:30pm | Session 7: La Marmotte
    • Evans, Anthony J., La Marmotte, January 2012
  • 4:00pm – 5:30pm | Session 8: Workshop 

Date: TBD

Location: TBD

 


Resources

Please get in touch if you would like further information.

The Great EU Debt Write Off

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This page presents the results of a simulation conducted by students at ESCP Europe Business School. The aim was to uncover the amount of interlinked debt between Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany; and then see what would happen if they attempted to cross cancel obligations.

The results were astounding:

  • The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
  • Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
  • Three countries – Ireland, Italy, and Germany – can reduce their obligations such that they owe more than €1bn to only 2 other countries
  • Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
  • France can virtually eliminate its debt – reducing it to just 0.06% of GDP

The study has been published by the journal Simulation and Gaming.

Images by Soapbox


The idea

The idea is very simple – if Portugal owes Ireland €0.34bn of short term debt, and Ireland owes Portugal €0.17bn, we can write off Ireland’s obligations and leave Portugal with a reduced debt of €0.17bn.If you are both a debtor and a creditor you do not need money to settle claims. Rather than require additional funds to deal with choking debt, why not write it off?
The diagrams above show the before and after situation, based on analysis done by students. The simulation itself took place on May 17th 2011 and involved three separate trading rounds.

Students in the Pre-Masters Year of the ESCP Europe Masters in Management program took part in the trial run on March 22, 2011, which involved only the PIIGS countries. The key results were the following:

  • Portugal was able to cut its debt in half, primarily because so much of that debt was held by Spain.
  • Ireland reduced its debt by 99.74%, mostly through deals with Spain and Portugal. It was able to make use of trading period 3 by moving short- and medium-term debt into long-term debt.
  • Italy had a weak bargaining position, as it began with the worst debt position (a high concentration of short-term debt). After reducing debt by 50% in period 1, it was unable to make further gains.
  • Greece reduced its debt by 11% but mostly because it had little exposure to the other PIIGS countries. It was unable to make any trades after period 1.
  • Spain managed to eliminate all of its debt obligations to the other PIIGS countries, although it owed significant amounts to Britain, France, and Germany. Spain found that it could deal with everyone at the table quite equally.

Main data sources


Resources for instructors

If you would like to replicate this simulation in your classroom, download this zip file. It includes:

  • All of our data (including sources and notes)
  • The starting positions for each country
  • The results table to provide real time information to students
  • A summary sheet for students to complete each round
Please let us know how you get on!

Further reading


Media coverage


For more details or media enquiries please contact Anthony J. Evans.