Selected Topics in Banking & International Finance: Crisis? Which Crisis?

Name of module in english: Crisis? Which Crisis?

Exam number: 6103

Semester: from 4th semester (Schwerpunktbildung)

Duration of the module: One Semester

Form of the module (i.e. obligatory, elective etc.): Elective

Frequency of module offer: Irregulary

Prerequisites: The students should be able to analyze macroeconomic shocks in the IS-LM-model and the AS-AD-model in a verbal, graphical, and formal way. The students should be able to master microeconomic concepts such as profit or utility maximization as well as a background in game theory. Furthermore, the students should have some background in statistics and should be able to construct and interpret confidence intervals, hypotheses tests and univariate regressions. All courses from the „orientation phase“ should be completed. Furthermore, students should have already completed a course in international economics. They should know the basic equilibrium concepts of the foreign exchange market such as uncovered interest rate parity (UIP) or purchasing power parity (PPP). Students should be able to analyse shocks in static open macro models of economies, which are (or are not) capacity constrained. This analysis might be performed in a verbal, graphical, and formal way. You have to register by sending an E-Mail to sass@europa-uni.de until November 10th, 2021. This deadline is also valid for all Erasmus / fx-students. Please use your Viadrina E-mail address if possible. Erasmus / fx students may also register via their private E-Mail address in case that the Viadrina E-Mail account is not set up yet.

• The time you send the E-Mail serves as ONE decision criterion whether you are in or out.
• Furthermore, we take into consideration whether you have completed the course International Monetary Economics (IME) in a previous semester.
• In order to increase the diversity and heterogeneity of the participants a few places are reserved for Erasmus /fx-students.

After registration via E-Mail we will registered you in the Moodle system. You cannot enroll by yourself in Moodle. Via the Moodle system you will receive all information/reading material for the course.
Capacity limit: 16 students

Applicability of module for other study programmes:
Obligatory or elective in other study programmes. For further information check regulations of the study programme.

Person responsible for module: Prof. Dr. Georg Stadtmann

Name of the professor: Prof. Dr. Georg Stadtmann

Language of teaching: German AND English

ECTS-Credits (based on the workload): 6

Workload and its composition (self-study, contact time):
Contact time (Lecture, tutorial etc.) 14 h; self-study: 166 h

Contact hours (per week in semester): 2

Methods and duration of examination:

• Participation in three group assignments (weight: 45 %):
• A complete submission of a seminar paper (about 5 – 7 pages) (weight: 55 %): March 31st, 2022.

Emphasis of the grade for the final grade: Please check regulations of the study programme

Aim of the module (expected learning outcomes and competencies to be acquired):
In the first part, we will review the building blocks of open macroeconomic models and their empirical validity. Afterwards, we will start to analyse the different generations of models designed to analyse currency crises. More specifically, we will talk about the following concepts: 1st generation crisis model: Where an unsustainable macroeconomic policy causes a crisis without any doubt. The surprising part is however, the point in time when the crisis occurs. 2nd generation crisis model: Where an attack might still be defended by the central bank. The policy maker weights the cost and benefits of defending the fixed exchange rate. The expectations of private financial agents play a central role. Therefore, we also highlight the role of self-fulfilling prophecies: When the agents expect that the system is stable the system is stable, when the agents expect that the system is unstable, the system is unstable. 3rd generation crisis model: Where a currency crisis and a crisis in the real economy occur simultaneously (twin crisis). Currency crisis models of the first or second generation might be isolated crisis – just related to the foreign exchange market. However, in some situations the crisis on the FX-market will spill-over o the real economy and cause a severe recession. The second part will be based on a movie called Das Wunder von Wörgl. The movie deals with a real world experiment conducted Switzerland in the 1930s. A major of a small village starts to print a kind of “money” (Arbeitswertbestätigungen = certificate of the value of work conducted) in order to inject liquidity into the economic system and in order to stabilize good demand and labour demand. In the movie, the experiment is presented to be quiet successful. However, it was terminated by the central bank and a court trial. We also want to analyse potential limitations and alternatives to this experiment on a theoretical basis. We might also look into empirical evidence related to this policy. (See below a longer description of the movie).
In relation to the study program's qualification profile, the subject explicitly focuses on:

• Gain knowledge about key macroeconomic concepts of the open economy.
• Gain knowledge about the differences between fixed and floating exchange rates and the role of central banks in order to stabilize the exchange rate in a fixed exchange rate system via central bank interventions.
• Gain knowledge about the reasons why fixed exchange rate systems break down.
• Gain knowledge about monetary and fiscal policy in a real economic crisis.
• In order to strengthen the competencies to independently take responsibility for own professional development and specialization a written seminar paper has to be delivered at the end of the semester. This will also strengthen the skills to structure economic thinking and to communicate with professionals and non-specialists in a written form.

Contents of the module:
Lectures:

Lecture 1: Review & case study
Lecture 2: 1st generation crisis model
Lecture 3: 2nd generation crisis model
Lecture 4: 3rd generation crisis model
Lecture 5: Real economic crisis: The case of the 1930s
Lecture 6: Monetary and fiscal policy in a crisis
Lecture 7: tba

Teaching and learning methods:
Lectures and seminar, self-studies

Special features (e.g. percentage of online-work, practice, guest speaker, etc.):
Language of teaching:

German AND English. Most of classes are taught in English. However, one longer movie – which is a central building block of the course – is only available in German language. Hence, you need some basic knowledge in order to understand the movie.

Further information:

1932. Die Weltwirtschaftskrise ist auf ihrem Höhepunkt. Die Arbeitslosenzahlen explodieren, radikale politische Bewegungen florieren und in einer Tiroler Gemeinde, Wörgl, wird der schmächtige, parteilose Lokführer Michael Unterguggenberger zum Bürgermeister gewählt. 'Und, weißt du schon, wie du die Welt rettest?' fragt ihn sein deprimierter, arbeitsloser Sohn. Angestichelt von der Not, der Verzweiflung und der Dummheit der Menschen und unterstützt von seiner starken Frau Rosa, initiiert Unterguggenberger ein wagemutiges Experiment: Er will kurzerhand sein eigenes Geld drucken. Auch wenn er es auf keinen Fall so nennen darf. Inspiriert von den Schriften des deutschen Kaufmanns, Finanztheoretikers, Sozialreformers und des Begründers der Freiwirtschaftslehre Johann Silvio Gesell und der 'Wära' in Schwanenkirchen (Bayern) sollen diese neuen Scheine, wenn sie nicht ausgegeben werden, an Wert verlieren: Schwundgeld. Eine Währung, die derart vergänglich ist wie rostendes Eisen oder verfaulendes Obst. Der neue Bürgermeister schafft es, den bis aufs Blut zerstrittenen Gemeinderat von seiner irrwitzigen Idee zu überzeugen. Bestaunt von der Weltöffentlichkeit gelingt es dem Wörgler Bürgermeister, in seiner kleinen Gemeinde nicht nur wirtschaftlichen Aufschwung sondern auch sozialen Frieden herzustellen. Nachbarorte und zahlreiche größere Städte wollen sich dem erfolgsgekrönten System anschließen. Doch der Regierung in Wien sind die Umtriebe in Wörgl ein Dorn im Auge. Die Österreichische Nationalbank sieht ihr Geld-Monopol bedroht, schickt Inspektoren aus und lässt das Experiment schließlich verbieten. Einhellig steht die Gemeinde aber hinter Unterguggenberger und zeigt sich rebellisch. Wörgl lädt zu einer Tagung: 170 begeisterte Bürgermeister aus dem ganzen Land versammeln sich, doch die Polizei stürmt die Veranstaltung und verhaftet Unterguggenberger. Ihm wird der Prozess in St. Pölten gemacht: David gegen Goliath. Das alles vor dem Hintergrund des aufstrebenden Nationalsozialismus, der Armut und Arbeitslosigkeit ganz anders zu instrumentalisieren weiß. Unterguggenberger wird schuldig gesprochen, das Experiment gestoppt. Und obwohl ihm auf Lebzeiten jede politische Betätigung untersagt bleibt, gelingt es Unterguggenberger ein letztes Mal Frieden zu stiften. Auf unorthodoxe Art und Weise und seinem Mantra verpflichtet: 'Es gibt immer eine Alternative.' Danach nimmt die Zeitgeschichte ihren dunklen Verlauf.

1932. The world economic crisis is at its peak. Unemployment figures are exploding, radical political movements are flourishing, and in one Tyrolean municipality, Wörgl, the lanky, party-less train driver Michael Unterguggenberger is elected mayor. 'So, do you know how you're going to save the world yet?" his depressed, unemployed son asks him. Stung by the misery, desperation and stupidity of the people and supported by his strong wife Rosa, Unterguggenberger initiates a daring experiment: He wants to print his own money without further ado. Even though he is by no means allowed to call it that. Inspired by the writings of the German merchant, financial theorist, social reformer and founder of the free economy doctrine Johann Silvio Gesell and the 'Wära' in Schwanenkirchen (Bavaria), these new bills are to lose value if they are not spent: Fading money. A currency as perishable as rusting iron or rotting fruit. The new mayor manages to convince the local council, which is at loggerheads, of the merits of his crazy idea. Marvelled at by the world public, the mayor of Wörgl succeeds in bringing about not only an economic upswing but also social peace in his small community. Neighboring towns and numerous larger cities want to join the successful system. But the government in Vienna finds the goings-on in Wörgl a thorn in its side. The Austrian National Bank sees its money monopoly threatened, sends out inspectors and finally has the experiment banned. However, the community unanimously supports Unterguggenberger and shows itself to be rebellious. Wörgl invites to a conference: 170 enthusiastic mayors from all over the country gather, but the police storm the event and arrest Unterguggenberger. He is put on trial in St. Pölten: David against Goliath. All this against the background of the rising National Socialism, which knows how to instrumentalize poverty and unemployment in a completely different way. Unterguggenberger was found guilty, the experiment was stopped. And although he is banned from any political activity for life, Unterguggenberger succeeds in making peace one last time. In an unorthodox way and committed to his mantra: 'There is always an alternative'. After that, contemporary history takes its dark course.  

Translated with www.DeepL.com/Translator (free version)

Literature (compulsory reading, recommended literature):
Das Wunder von Wörgl → Amazon link 4 EUR!
https://www.amazon.de/Das-Wunder-W%C3%B6rgl-Verena-Altenberger/dp/B0826F2WYJ/ref=sr_1_1?__mk_de_DE=%C3%85M%C3%85%C5%BD%C3%95%C3%91&dchild=1&keywords=das+wunder+von+w%C3%B6rgl&qid=1627203174&sr=8-1

Berthold, Kristin, Georg Stadtmann (2018): Who put the Holes in the Swiss Cheese? Currency Crisis Under Appreciation Pressure. Journal of Central Banking Theory and Practice,  1, pp. 43-57. DOI: 10.2478/jcbtp-2018-0003

Other selected papers

Further information:
Registration in Moodle Viadrina required.