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School of Business and Economics

Bachelor Master

2014 Maastricht University School of Business and Economics

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COURSE BOOK

Emergence of the global

economy

EBC4153

Academic Year: 2016-2017

Course Period: 5

© dr. T. Treibich, dr. M. Capasso, prof. dr. B.

Verspagen, dr. A. van Zon

Maastricht University, 2010, 2011, 2012, 2013,

2014, 2015, 2016.

All rights reserved. No part of this publication may

be reproduced, stored in a retrieval system, or

transmitted, in any form or by any means,

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the publishers.

Emergence of the global economy - EBC4153 - 2016-2017 Page 2 of 22

Table of Contents

1. Introduction ......................................................................................................................................... 3

2. Learning objectives .............................................................................................................................. 4

3. Course structure .................................................................................................................................. 5

3.1 Organization of the course ............................................................................................................ 5

3.2 Overview of the sessions ............................................................................................................... 5

4. Assessment requirements ................................................................................................................... 7

4.1 Student presentations ................................................................................................................... 7

4.2 Team task ...................................................................................................................................... 7

4.2 Exam .............................................................................................................................................. 7

4.3 Participation and attendance ........................................................................................................ 7

4.4 Final grade and resit ...................................................................................................................... 8

4.5 Fraud and plagiarism ..................................................................................................................... 8

4.6 Complaints ..................................................................................................................................... 9

5. Planning group .................................................................................................................................... 9

6. Literature ........................................................................................................................................... 10

7. Meetings ............................................................................................................................................ 11

Group Session 1. Terms of Trade ...................................................................................................... 11

Group Session 2. Economic growth in the world economy .............................................................. 12

Group Session 3. The World Income Distribution and International Diffusion of Knowledge ......... 13

Group Session 4. The East-Asian Growth Miracle ............................................................................. 15

Group Session 5. Growth, Trade and the product space .................................................................. 16

Group Session 6. Why doesn’t capital flow from rich to poor countries? ........................................ 17

Group Session 7. Financial flows and crisis ....................................................................................... 18

Group Session 8. Global imbalances and the financial crisis ............................................................ 20

Group Session 9. Global imbalances and the financial crisis ............................................................ 21

(counterargument) ............................................................................................................................ 21

Group Session 10. Team Task ............................................................................................................ 22

Group Session 11. Recap and preparation for the exam .................................................................. 22


1. Introduction

Globalization is one of the most debated economic phenomena. Although globalization is

not purely an economic matter, it has strong roots in economic processes, such as trade,

economic development, capital flows, and innovation. Globalization raises strong

sentiments, for example from activists who claim that it is inherently unfair, or politicians

and business men who claim it is the way forward to a better world.

In such a polarized debate, scholarly analysis can be an anchor of reason, or an

instrument for persuasion and advocacy. While the latter may not be in accordance with

the “classical” academic values and norms, it cannot be denied that scholars, economists

in particular, are active in the debate around globalization. What is important in such

cases, is that the analysis underlying the arguments is conducted in a proper and

transparent way. Taking this principle as a starting point, this course provides an

introduction into the economic research that goes into the globalization debate.

The topics that are dealt with fall into two large groups. The first deals with economic

growth and development, and asks whether or not globalization leads to a more even

income distribution in the world. The second topic is concerned with macroeconomics,

and asks how global capital flows (financial globalization) affect the working of the macro

economy. Obviously, the economic analysis of globalization is broader than just these

two topics. Therefore, the course assumes prior knowledge on some of the basic issues in

international economics, such as trade theory, and the basic ideas of open

macroeconomics.


2. Learning objectives

This course is aimed to provide students with advanced insights into the economic driving

forces behind globalization, and how specific issues in the globalization debate can be

analyzed using state-of-the-art economic research. The course is aimed at students at a

relatively advanced level. In particular, basic knowledge about international economics

and open macroeconomics, as well as econometric and mathematical research methods,

is required before entering this course.

Connected to its topical and advanced nature, the course does not rely on a textbook.

Instead, it presents the students with a list of papers from contemporary economic

journals and books. In this way, students get introduced to the debates in a direct and

hands-on way. This approach does require an extra effort from students. Part of

becoming an economist is being able to read the literature, and this course provides an

important test in this respect. It requires students to draw upon their prior knowledge

and to apply this in reading and understanding the papers that form the required

literature for the course.


3. Course structure

3.1 Organization of the course

The course is divided into 2 parts, which correspond with the two topics introduced

above. The first part deals with economic growth and global income distribution. This

part uses growth theory and (some) trade theory, and is focused around the central

question whether globalization leads to convergence of living standards or not.

The guiding theme of the second part of the course is the free flow of capital. This is

analyzed both in an historical way (covering the broad history of globalization from the

financial point of view), and an analytical way. This part of the course builds to an

important extent upon the so-called Mundell-Fleming model, with which students need to

be familiar.

The course uses the problem based learning (PBL) method that is common at Maastricht

University. This means that students have to work in small groups. This is explained in

more detail in Section 4 below.

3.2 Overview of the sessions

In each of the group sessions, students deal with one topic. The sessions do not follow

the pattern of pre- and post-discussion that may be familiar to students, especially those

who did a bachelor degree in Maastricht. Instead, students are required to read the

required literature for the session in advance, and discuss this literature during the

session. An important part of the session will be devoted to discussing the content of the

reading, up to a fairly detailed level, including technicalities on mathematics and/or

econometrics, where relevant.

The introduction to the sessions that will be given below provides starting points for

discussing additional topics. These topics have been arranged in such a way that there

are important linkages among the sessions, so that an overall coherent picture of

globalization emerges when sticking to these topics. Students are encouraged to include

these connections among the various topics in the discussion of each session.

The group sessions are scheduled as presented in Table 1 below.


Table 1. Overview of the sessions

Week Day Session Topic Literature Presenta

tion

Part 1. Growth, technology and global distribution

1 W 1 Terms of Trade Singer (1950)

Kaplinsky (2006)

2 M 2 Economic growth in the world economy Maddison (2003)

Cohen (2003)

I1

W 3 The World Income Distribution and

International Diffusion of Knowledge

Verspagen

(1991)

I2

3 M 4 The East-Asian Growth Miracle Nelson and Pack

(1999)

I3

W 5 Growth, trade and the product space Hidalgo et al.

(2007)

I4

Part 2. Financial globalization

4 M 6 Why doesn’t capital flow from rich to poor

countries?

Lucas (1990) I5

W 7 Financial flows and crisis Knoop (2008a)

Knoop (2008b)

I6

5 M 8 Global imbalances and the financial crisis Wolf (2010) I7

W 9 Global imbalances and the financial crisis

- counterargument

Borio and

Disyatat (2011)

I8

6 M 10 Team task

W 11 Recap


4. Assessment requirements

4.1 Student presentations

During Session 1, the tutor assigns one of the topics to be discussed between the other

sessions to each student.

Description

Each student will be assigned one scientific article, citing one of the articles in the

compulsory literature corresponding to the chosen topic. In other words, the student has

to study one (more recent) article that has cited the articles (or chapters) compulsory on

the topic.

Presentation

In the second hour (of each of sessions 2 to 9), the student presents, in maximum 30

minutes, the more recent article. Some amount of time within the presentation should be

devoted to illustrate the differences between that article and the article (or chapter) of

the compulsory literature which cites it. Clarity and precision of the presentation, as well

as depth in the comparison with the corresponding article in the compulsory literature,

will be the main criteria used to grade the team work. The presentation slides, as well as

a half page summary must be sent to the tutor and the rest of the class 12 hours before

the presentation (in case the deadline is not respected, the presentation grade will be

lowered by half a point). In the remaining half hour, the other students give constructive

feedback.

4.2 Team task

During session 10, the entire group of students presents their output from the Team Task

(details will be provided on the Student Portal). All the members of the team receive the

same grade.

4.2 Exam

The course ends with a 3 hour written exam with open questions, which will take place in

the second week of June 2017 (5-9 June).

4.3 Participation and attendance

Each student will receive a grade for overall group participation during the group

sessions. The participation grade reflects the level of interaction with the group during

the session, the pertinence and depth of the interaction, and the knowledge of the course

literature shown during the interaction. A good question to the group is valued as well as


a good answer.

Students need to attend at least 8 of the 11 meetings in order to pass the

course. Attending more than 8 meetings will be rewarded in the participation grade (by

not considering some of the meetings in which the student participation was below

her/his average), while attending less than 8 meetings will be penalized in the

participation grade (by considering a null participation for each additional missed

meeting). Students failing the attendance requirement will need to pass the course

assignment in order to pass the course, to be submitted within 48 hours after the exam.

4.4 Final grade and resit

The final grade for the course is equal to the grade of the written exam (weighted 40%)

plus the grade for group participation (weighted 10%), plus the grade for the individual

project (weighted 40%), and finally the team task (weighted 10%). The final grade is

rounded to closest ½ points, the partial grades are rounded to the closest 0.1 point.

In order to pass the course, the final grade must be at least 5.5 and the exam grade

must be at least 5. If not, the student will have to do a new written exam.

The examination requirements are summarized in Table 2 below.

Table 2. Assessment requirements

Assessment

elements

Description Grade and

grade

weight

Required If fail

1 Written exam Open questions 40% 5 Resit written

exam in exam

period 6

2 Individual

project

Presentation 40% - -

3 Team task Presentation 10%

4 Participation Group meetings +

feedback

10% - -

Final grade Weighted average of

1,2, 3 and 4

5.5 Resit written

exam in exam

period 6

Attendance 8

meetings

Course

assignment

4.5 Fraud and plagiarism

In order to protect the reputation of the degrees that you – as students – receive,

instances of cheating or plagiarism are treated extremely seriously.


Fraud, including plagiarism, is understood as a student’s act or failure to act that makes

it partially or fully impossible to correctly assess his/her knowledge, insight and skills.

Plagiarism is understood as the presentation of one’s own or other people’s ideas or

words without adequate reference to the source. Any assignment is an individual piece of

work, which means that plagiarism is strictly forbidden. Equally, the use of mobile

phones, communication devices or any other information carrier (whether the phone or

other device is turned on or off, used or not used, etc. is irrelevant) during an

examination is also forbidden. If the Board of Examiners concludes that anything has

occurred in an examination that makes it partially or fully impossible to correctly assess

his/her knowledge, insight and skills, they may impose a sanction in accordance with

SBE’s policy on fraud, including plagiarism.

More information can be found on the Student Portal.

4.6 Complaints

If you do not agree with the examination or the results therefore, there are several

procedures in place you can make use of. Please refer to the Student Portal for more

information.

Comment

Within five days after the examination date you can submit comments on the content

and design of the examination (questions) to the course coordinator.

Inspection

Within ten working days of the publication of your examination results, you will be able

to have a look at your assessed work. The date and time of the inspection will be

published on the Student Portal and preferably already stated on the front page of the

examination sheet.

Complaint

Students can lodge a complaint during the inspection by using the complaint form.

Appeal

For information regarding an appeal procedure, please read the information on the

Student Portal carefully.

5. Planning group

The planning group consists of Dr. Tania Treibich (coordinator of the course) and Dr.

Adriaan van Zon.


6. Literature

The required literature consists of a number of articles and book chapters by various

authors. Some of these references cover advanced material. The list of required literature

is as follows:

Borio, C.E. and Disyatat, P., 2011, “Global imbalances and the financial crisis: Link or

no link?”, BIS Working Papers No 346.

Cohen, D. (2003) “Growth in Theory and in Practice”, Chapter 3 in: Jorge Braga de

Macedo, J., Foy, C. and C.P. Oman (eds), Development is Back, Paris: OECD

Development Centre, pp. 47-60.

Hidalgo, C. A., Klinger, B., Barabási, A. L., & Hausmann, R., 2007, "The product

space conditions the development of nations." Science, 317, p. 482-487.

Kaplinsky, R., 2006, ‘Revisiting the Revisited Terms of Trade: Will China Make a

Difference? ’, World Development 34, 6, pp. 981-995.

Knoop, T.A., 2008, ‘Capital flight and the causes of international financial crises’, Chapter

9 in Modern Financial Macroeconomics: Panics, Crashes, and Crises, Blackwell, pp.

193-214.

Knoop, T.A., 2008, ‘International Financial Crises: policies and prevention’, Chapter 10 in

Modern Financial Macroeconomics: Panics, Crashes, and Crises, Blackwell, pp. 215-

235.

Lucas, R.J., 1990, ‘Why Doesn't Capital Flow from Rich to Poor Countries?’, American

Economic Review, 80, pp. 92-96.

Maddison, A. (2003), The West and the Rest in the International Economic Order,

Chapter 2 in: Jorge Braga de Macedo, J., Foy, C. and C.P. Oman (eds), Development is

Back, Paris: OECD Development Centre, pp. 31-46

Nelson, R.R. and H. Pack, 1999, ‘The Asian Miracle and Modern Growth Theory’,

Economic Journal, 109, pp. 416-436.

Singer, H.W., 1950, ‘The Distribution of Gains between Investing and Borrowing

Countries’, American Economic Review, 40, 2, pp. 473-485.

Verspagen, B., 1991, ‘A New Empirical Approach to Catching Up and Falling Behind’,

Structural Change and Economic Dynamics, vol. 2, pp. 359-380.

Wolf, M., 2010, “From Imbalances to the Subprime Financial Crises”, Chapter 8 in Fixing

Global Finance, Yale University Press.


7. Meetings

Part 1. Growth, technology and global distribution

Group Session 1. Terms of Trade

This task will be prepared in class in the first session

Trade and technical change impact prices, and the variation of prices has an impact on

both producers and consumers. Moreover, producers and consumers of a particular good

may be in different countries, or may correspond to different groups of people within the

same country, and, for each good, the formation of the price is affected in different

proportions by supply and demand.

How can the evolution of the “terms of trade” impact the development of a country?

How can the country’s policymakers take this into account when aiming at long-term

prosperity?

Singer (1950) shows that an analysis of the influence of trade on growth, especially when

referring to policies aimed at reducing the income gap across countries, must take into

account potential vicious circles that originate in the dynamics of prices of traded goods.

Half a century later, and just before the 2007-2008 crisis, Kaplinsky (2006) reexamines

Singer’s thesis in the light of the new context of globalization, which includes the

increasing importance of China and India.

Which price dynamic has emerged during the new globalization age? Is it going to

reverse in the future, or could it be persistent and affect the long-run development of

several countries around the world?

Literature:

Singer, H.W., 1950, ‘The Distribution of Gains between Investing and Borrowing

Countries’, American Economic Review, 40, 2, pp. 473-485.

Kaplinsky, R., 2006, ‘Revisiting the Revisited Terms of Trade: Will China Make a

Difference?’, World Development 34, 6, pp. 981-995.


Group Session 2. Economic growth in the world economy

Our main interest, for this first part of the course, is to search for a deep (theoretical)

explanation of the relationship between growth, development and globalization. After

having analysed, in the previous session, the evolution of the terms of trade, we can now

have a broad look at the empirical patterns of economic growth, especially after 1950.

Maddison (2003) divides history into broad periods, each with their own characteristic

pattern of global economic growth. In your discussion of this paper, you should focus on

one broad question (see also a brief note on Cohen’s paper below):

How do you interpret the relationship between globalization and economic growth from

the perspective of these two historical characterizations?

The second reading for this session, by Daniel Cohen (2003), provides a starting point for

the analysis of economic growth in our remaining sessions. It provides a brief

introduction to many topics, tools and theories that will play a role in the coming

sessions. This starts with the idea of “conditional convergence”, which is not explained

very elaborately in the chapter itself.

Conditional convergence refers to the idea that if one controls for factors such as

education levels, the correlation between initial GDP per capita and growth rates of that

variable is negative. In other words, Figure 2 in the chapter by Cohen is constructed by

first running a regression with GDP per capita growth as the dependent variable, and

initial GDP per capita and education as explanatory variables. The figure is then

constructed by adding to the variable on the horizontal axis of Figure 1 (the growth rate)

the effect of education as predicted by the regression. Focus your discussion on the

implications of this finding.

The section on “inspiration and perspiration” is directly linked to our session 4 on growth

in East Asia. It raises the question whether these two factors (inspiration and

perspiration, or total factor productivity and investment) can really be separated in a

meaningful way. Although we will go into this in much more detail in the later session,

you should already discuss the broad conceptualization in this session.

Finally, Cohen goes into the topics of globalization and institutions. Of course,

globalization is already at the core of the comparison between Maddison on the one

hand, and Obstfeld and Taylor on the other hand (which will be studied later in the

course). You may well include Cohen’s observations on trade, globalization and growth in

that discussion. Institutions can broadly be defined as “the rules of the game” (formal

and informal) that are used in an economy. Following Cohen’s chapter, you should discuss

the definition and role of institutions.

Literature:

Maddison, A. (2003), The West and the Rest in the International Economic Order, Chapter

2 in: Jorge Braga de Macedo, J., Foy, C. and C.P. Oman (eds), Development is Back,

Paris: OECD Development Centre, pp. 31-46

Cohen, D. (2003) Growth in Theory and in Practice, Chapter 3 in: Jorge Braga de

Macedo, J., Foy, C. and C.P. Oman (eds), Development is Back, Paris: OECD

Development Centre, pp. 47-60


Group Session 3. The World Income Distribution and International Diffusion of

Knowledge

In this session, we deepen the analysis of convergence, which will be a recurring theme

throughout the course. The graph below provides data on this phenomenon, by means of

a smoothed histogram of income levels in the world. The vertical (‘Z’) dimension of the

graph shows how often a particular value of ln(GDP per capita) (again from Maddison’s

database) occurs in the sample of countries in the world, for a particular year. Does

convergence actually take place?

Figure 1. Evolution of the GDP per capita distribution over time.

Arguably, very little. The distribution seems to have two, or even three peaks, which

indicate concentrations of development levels at these particular values. These peaks are

stable over a long period, and this seems to point to a lack of convergence.

The next figure (next page) provides yet another perspective on convergence. It is a

slight variation of the graph that we have already seen in Cohen’s chapter in the previous

session. But now the sample is larger (we use a shorter time period), and groups of

countries are separated. This last feature reveals an interesting fact: in some groups of

countries, convergence is unconditional (i.e.. one does not have to condition on factors

such as human capital in order to obtain a negative regression line in the figure), while

for other groups, convergence is clearly not unconditional.


The reading for this session suggests that one of the most powerful sources of

convergence of income levels over countries is the international diffusion of knowledge.

Poor countries are poor because they do not have access to economically useful

knowledge, but, since knowledge is in some aspects almost like a public good, these poor

countries have a large potential to catch up by using “freely” available knowledge. The

model that is suggested point to low-development traps that might occur as a result of a

lack of diffusion of knowledge.

You should focus on understanding the technical aspects as well as the main theoretical

intuitions of the model. Once you master this, try to explain what you see in both figures

here by means of the model in the reference.

Figure 2. Growth rate of GDP per capita in 1950-2006 vs. 1990.

Source: calculations on Angus Maddison’s database.

Literature:

Verspagen, B., 1991, A New Empirical Approach to Catching Up and Falling Behind,

Structural Change and Economic Dynamics, vol. 2, pp. 359-380.


Group Session 4. The East-Asian Growth Miracle

The notion of total factor productivity (TFP) has been suggested as a measure of the

impact of technological change in the growth process. The idea of TFP is similar to labour

productivity, but it looks at the joint productivity of two factors (capital and labour),

rather than just one factor. Traditionally, TFP has been seen as an important source of

macroeconomic productivity growth (e.g., Solow, in his path-breaking article on TFP,

found it to be the most important factor in explaining growth in the U.S. in the first half

of the 20th century).

But as we already saw briefly in the chapter by Cohen that was on the reading list for

Session 2, measures of TFP for the East Asian countries that were star growth performers

in the second half of the 20th century usually show a much smaller impact of TFP on

growth. Some economists, such as Alwyn Young, argue that growth in these countries is

almost completely explained by increases in labour and capital inputs, i.e., that

productivity growth is very small.

Does this imply that technology transfer and upgrading of the production structure are

not important ingredients of the catching-up process of East Asian countries? Some

commentators on Young’s results have argued that the aggregate numbers hide

important sectoral trends that show the true dynamism of the East Asian miracle

countries. In particular, Nelson and Pack suggest that the investment that was associated

with rapid growth in East Asia was not merely “perspiration”, i.e., not merely using more

resources. They argue that the investment boom was part of a process of structural

change that involved a deep transformation of the East Asian economies, under the

influence of technological change. They provide a model and a theory about how this

process took place, and your first issue for discussion should be to understand how this

model works, and what it argues about growth in East Asia.

Second, an important part of the Nelson and Pack analysis is aimed at explaining why

total factor productivity (TFP) is not a good concept to analyze these issues. They argue

that TFP does not measure the contribution of technology and innovation to growth in an

adequate manner. Their reasoning in this respect involves a high degree of abstraction,

and a good command of the underlying notion of the production function. Discuss their

criticism, and try to form an opinion on the debate on “accumulation” vs. “assimilation”.

Literature:

Nelson, R.R. and H. Pack, 1999, ‘The Asian Miracle and Modern Growth Theory’, Economic

Journal, 109, pp. 416-436.


Group Session 5. Growth, Trade and the product space

We have now seen, for the case of East Asia, a specific perspective on growth which

devotes particular attention to technological change and innovation, and structural

change, i.e. the sectors and products a country is specialized in and exports.

In a series of article, and then in their Atlas of Economic Complexity, César Hidalgo and

coauthors from MIT have put forward the explanatory power of a new measure they call

“Economic Complexity” in explaining past and future growth patterns of countries.

“Why do some countries grow and others do not? The authors of The Atlas of

Economic Complexity offer readers an explanation based on "Economic

Complexity," a measure of a society’s productive knowledge. Prosperous

societies are those that have the knowledge to make a larger variety of more

complex products. The Atlas of Economic Complexity attempts to measure the

amount of productive knowledge countries hold and how they can move to

accumulate more of it by making more complex products.

Through the graphical representation of the "Product Space," the authors are

able to identify each country's "adjacent possible," or potential new products,

making it easier to find paths to economic diversification and growth. In

addition, they argue that a country’s economic complexity and its position in

the product space are better predictors of economic growth than many other

well-known development indicators, including measures of competitiveness,

governance, finance, and schooling.

Using innovative visualizations, the book locates each country in the product

space, provides complexity and growth potential rankings for 128 countries,

and offers individual country pages with detailed information about a

country’s current capabilities and its diversification options. The maps and

visualizations included in the Atlas can be used to find more viable paths to

greater productive knowledge and prosperity.”

Introduction to the Atlas of Economic Complexity (link to webpage)

Literature:

Hidalgo, C. A., Klinger, B., Barabási, A. L., & Hausmann, R., 2007, "The product space

conditions the development of nations." Science, 317, p. 482-487.

https://mitpress.mit.edu/books/atlas-economic-complexity


Part 2. Financial globalization

Group Session 6. Why doesn’t capital flow from rich to poor countries?

Decreasing marginal returns is a very important concept in microeconomic theory. When

applied to a production function (like the Cobb-Douglas production function) it implies

that the rate of return to capital (investment) is high in cases when output per capita is

low (this is easily said, of course, but make sure that you understand why this is the

case; the literature for this session gives details, both mathematically and intuitively).

Therefore, if two countries have the same production function, the difference in the rates

of return to capital investment in these countries will be related to how much they differ

in terms of per capita output. More specifically, the rate of return in developing countries

is expected to be higher than in developed countries.

If this process works as it should, capital should flow from rich countries to poor

countries. However, for the recent period, the IMF Data Mapper shows a rather different

picture: the advanced economies have a current account deficit, and the emerging

economies show a current account surplus. We have also already encountered this

phenomenon in the course opening, and in session 6. It is clear that this provides a

puzzle. But even before the global imbalances, it was clear that far less capital flows from

developed countries to developing countries that would be expected on the basis of

calculations of the rate of return using a Cobb-Douglas production function. This is known

as the Lucas puzzle, after the paper that we have read for today.

A first goal for your discussion should be to understand Lucas’ calculations. How does he

derive expectations about the rates of return, and how do these change when he

modifies, step-by-step, the assumptions about the nature of the production function? A

second goal is to understand the explanations that Lucas offers for the puzzle that he

observes. One such explanation may be related to the assumption that developing and

developed countries are on the same production function. This means, among other

things, that technological knowledge available to developed and developing countries is

the same. In what ways could this be true or not true? Lucas presents a number of

potential answers to this question. But perhaps you can also come up with additional

answers?

Literature:

Lucas, R.J., 1990, ‘Why Doesn't Capital Flow from Rich to Poor Countries?’, American

Economic Review, 80, pp. 92-96.


Group Session 7. Financial flows and crisis

Freely flowing capital improves resource allocation, but it also implies a number of risks

for the global economy. For example, on the basis of the available data (which are not

completely up-to-date), it may be argued that globalization leads to an increased number

of financial crises.

Figure 3. Number of banking and currency crises, 1880-2000.

Source: Michael Bordo’s database

The Asian crisis of 1997 hit particularly hard in part of the developing world. It raised

worries, both in the countries that directly experienced the crisis and in other parts of the

world, about the fragility of the global financial system. Does this aspect of globalization

show that free capital flows are not so good for the economy after all?

The literature references for this session provide a broad overview of the topic of crisis

and financial globalization. This broad overview does not go into many details of the


actual theoretical models that exist in this field. Instead, it tries to capture the broad

lines of the argument. Accordingly, your discussion should focus on these broad lines.

What different classes of models exist, and how do they differ? Which typical

explanations of crisis do you think are most relevant?

You should also focus on the recent events, i.e., the financial crisis of 2007-2008 and its

aftermath. The reading does not capture this to a full extent yet, but our next two

sessions will cover this topic in detail. In this session, you can prepare yourself for next

session by thinking about how the current reading relates to recent global economic

affairs.

The second of the two readings goes into the issue of policy. The central questions here

are whether some restrictions to capital flows are beneficial, and whether international

organizations such as the IMF should play a different role than they do now. This is an

important topic and should play an important role in your discussion.

Literature:

Knoop, T.A., 2008, ‘Capital flight and the causes of international financial crises’, Chapter

9 in Modern Financial Macroeconomics: Panics, Crashes, and Crises, Blackwell, pp.

193-214.

Knoop, T.A., 2008, ‘International Financial Crises: policies and prevention’, Chapter 10 in

Modern Financial Macroeconomics: Panics, Crashes, and Crises, Blackwell, pp. 215-

235.


Group Session 8. Global imbalances and the financial crisis

Martin Wolf, a journalist at the Financial Times, has popularized the view that the global

imbalances were the main cause of the 2008 financial crisis, and the global recession

following it. In his book ‘Fixing Global Finance’, which we will read partly for this session,

he outlined the idea that global imbalances helped to keep interest rates low, which led

to an increased appetite for risk in financial investment, and ultimately to the sub-prime

mortgage crisis. But the great macroeconomic minds of the world do not seem to agree

whether such a view is indeed a realistic explanation. Perhaps other factors, such as

weak financial regulation and greed, are more important for explaining the mother of all

crises?

The argument of Wolf is based in the particular situation that characterized the world

economy before the crisis. He puts forward the hypothesis that it was linked to

globalization. The guidance for the discussion is simple: focus on understanding Wolf’s

dissection of the crisis, and how relevant you think it is. Also, do you feel that Wolf’s

interpretation of the crisis should lead us to be pessimistic about the benefits of financial

globalization?

Literature:

Wolf, M., 2010, “From Imbalances to the Subprime Financial Crisis”, Chapter 8 in Fixing

Global Finance, Yale University Press.


Group Session 9. Global imbalances and the financial crisis

(counterargument)

In this final session of the “Financial Globalization” part of the course, we will discuss

both the nature of the crisis of 2007 and 2008, and the hypothesis that it was linked to

globalization. Borio and Disyatat (2011) present a view which is different from Wolf’s,

opposing the idea that global imbalances are at the source of the 2007 financial crisis.

Literature:

Borio, C.E. and Disyatat, P., 2011, “Global imbalances and the financial crisis: Link or no

link?”, BIS Working Papers No 346.


Group Session 10. Team Task

Group Session 11. Recap and preparation for the exam

Documents

Emergence of the global economy - Maastricht Universitysbe.maastrichtuniversity.nl/mscesem/wp-content/uploads/... · 2017-11-30 · Emergence of the global economy -EBC4153-2016-2017