Few basic lessons on macroeconomics

David Moss of Harvard Business School has written a basic book on macroeconomics -  A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know.

There is a nice interview of Moss here. He explains basics of macroeconomics:

Q: You mentioned that you can’t predict exchange rates. But are there rules of thumb managers can practice when thinking about exchange rates and how to play them?

A: I’ll mention several.

First, as I just suggested, it makes sense to look at a country’s current account deficit or surplus. For countries that are running large current account surpluses, like China and Japan, you’d expect their currency to appreciate over sustained periods of time. I can’t say for sure that Japan’s currency is going to appreciate over time, but in all likelihood, it will. I would be very surprised if China’s doesn’t appreciate over time.

Another thing you want to look at is inflation. If a country has a higher inflation rate than its trading partners, you should expect that its currency is likely to depreciate over time as well.

Maybe I can put this in some perspective. Over the long term, a main driver of a country’s exchange rate is probably its current account deficit or surplus. In the medium term, you probably want to look at inflation rates. But at the day-to-day level, changes in short-term interest rates seem to be a key driver. For example, if the European Central Bank suddenly (and unexpectedly) raises its key short-term interest rate tomorrow, you’re probably going to see the euro appreciate, almost immediately. If the central bank of the United States—the Fed—unexpectedly lowers its interest rate, the dollar may well depreciate a bit that same day. You tend to see these very quick fluctuations associated with interest-rate changes. But over the longer term, the current account balance is probably far more important.

Read the full thing for more details. He says there are 3 pillars of macroeconomics – output, money and expectations. Read that bit.

In the end he says:

Q: As a field of academic study, where do you think macroeconomists have made the most progress?

A: There’s a lot that macroeconomists don’t know. But I think in monetary policy they’ve made a good deal of progress. Had we had the same level of knowledge today that we had in the early 1930s, we might have faced a second Great Depression. Bernanke, of course, was a careful student of the Great Depression; he understood it quite well, particularly from a monetary standpoint. The level of monetary understanding is much better than it was in the past. And that reduces our odds of falling into another Great Depression. Again, it doesn’t eliminate those odds, but it reduces them. Macroeconomists deserve a lot of credit for that.

That said, excessively low interest rates during the boom years may well have helped to cause the crisis. So monetary policy, while much better than in the past, is still nowhere near perfect. For example, we still know very little about how to prevent a bubble from becoming a problem in the first place.

Q: In your own field of research, what are you working on these days?

A: Well, I’m working on a number of things. I’ve spent a great deal of time over the past year thinking about financial regulation and what it should look like, and I’ve been talking with lawmakers in Washington about this quite a bit.

I’ve also launched a new second-year course at Harvard Business School on financial history. I started creating the course long before the financial crisis hit, but it’s definitely been fascinating to teach about past financial booms and busts—about the history of financial innovation, financial growth and excess, and financial regulation—at this particular moment.

Financial history has truly come alive over the past couple of years. My hope is that we can use that history—the long history of financial markets and institutions—in figuring out how to prevent another financial crisis going forward. That’s where much of my work has been focused these days.

Another one for economics/financial history.

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