COURSE OVERVIEW: This course, which is an elective within the graduate specialization in international and development economics (pending university approval), focuses on international finance and open economy macroeconomics. Over the past three decades, the degree of international financial integration has grown tremendously and, as a result, all countries-from industrialized to emerging and transition economies- are experiencing vastly increased cross-border financial flows. The main objective of this course is to describe and examine how these developments have affected national economies, domestic as well as regional and international economic policies, financial markets, and international institutions. In the process, students will be exposed to the four main dimensions of the vast literature in the field: theory, evidence, policy, and institutions. Topics that will be considered include: balance of payments adjustment; exchange rate determination; international financial flows; economic policy under different exchange rate and monetary regimes; monetary integration; international monetary system.
READINGS: Given the variety of topics, the readings for this course will draw on a variety of sources (books, monographs, journal articles, working papers). The required textbook, which is available at the UNM bookstore, is International Money and Finance (3rd ed.) by C. Paul Hallwood and Ronald MacDonald, Blackwell Publishers, 2000. Other references to consult are: (1) Gene M. Grossman and Kenneth Rogoff (eds.), Handbook of International Economics (vol. 3), Elsevier Science, 1995; (2) Paul De Grauwe, International Money: Postwar Trends and Theories (2nd ed.), Oxford University Press, 1996; and (3) Maurice Obstfeld and Kenneth Rogoff, Foundations of International Macroeconomics, MIT Press, 1996.
The following books are on 2-hour reserve at Parish Library. Further references may be added as needed.
Das (1993), International
Finance: Contemporary Issues.
DeGrauwe (1997), The
Economics of Monetary Integration.
De Grauwe (1996),
International
Money: Postwar Trends and Theories (2nd edition).
Dornbusch (1980),
Open
Economy Macroeconomics.
Grossman and Rogoff,
eds. (1995), Handbook of International Economics (vol. 3).
Hallwood and MacDonald
(1994), International Money and Finance (2nd edition).
Rivera-Batiz (1994),
International
Finance and Open Economy Macroeconomics.
Stevenson et al. (1988),
Macroeconomic
Theory and Stabilisation Policy.
COURSE GRADE: Course requirements include periodic short assignments (problem sets, reports on readings, short presentations), one exam, and a research paper (instructions will be distributed separately). The final grade is a weighted average of your performance on the short assignments (4x30=120 pts.=30%), the exam (140 pts.=35%), and the paper (140 pts.=35%). There are 400 possible semester points. Fractionalized grading (+/-) will be used.
Important Dates:
Tuesday, Sept. 10
assignment #1 due
Tuesday, Oct. 1
assignment #2 due
Tuesday, Oct. 8
exam
Tuesday, Oct. 22
paper proposal due
Tuesday, Oct. 29
assignment #3 due
Tuesday, Nov. 19
paper due
Tuesday, Dec. 3
assignment #4 due
Thursday, Dec. 5
class presentations about assignment #4
PREREQUISITE: ECON 503 or permission of instructor.
OTHER INFO: Readings will be assigned on a weekly basis. Students are expected to come to class prepared and actively participate in classroom discussions. Qualified students with disabilities needing appropriate academic adjustments should contact the instructor as soon as possible to ensure their needs are met in a timely manner. Handouts are available in alternative accessible formats upon request.
A. Introduction to International Finance (2-3 weeks)
1. Basic Concepts: Balance of Payments and Exchange Rates
** Hallwood & MacDonald, Chapters 2-4.
De Grauwe, Chapter 1.
2. Overview of Policy Issues and Research Questions
** Hallwood & MacDonald, Chapters 5-6.
De Grauwe, Chapter 2.
* Eichengreen, B., 1994, "History of the International Monetary System: Implications for Research in International Macroeconomics and Finance," Chapter 6 in F. Van der Ploeg (ed.), The Handbook of International Macroeconomics, Cambridge: Basil Blackwell.
Obstfeld, M., 2001, "International Economics: Beyond the Mundell-Fleming Model," NBER Working Paper # 8369.
* Obstfeld, M. and K. Rogoff, 2000, "The Six Major Puzzles in International
Macroeconomics: Is There a Common Cause?" NBER Macroeconomics Annual,
Cambridge: MIT Press.
B. Exchange Rate Behavior and Theories of Exchange Rate Determination (3-4 weeks)
1. Purchasing Power Parity (PPP)
** Hallwood & MacDonald, Chapter 7.
* De Grauwe, Chapter 5.
Froot, K. and K. Rogoff, 1995, "Perspectives on PPP and Long-Run Real Exchange Rates," Chapter 32 in Handbook of International Economics.
Mark, N.J., 1995, "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, 85(1), pp. 201-18.
* Rogoff, K., 1996, "The Purchasing Power Parity Puzzle," Journal of Economic Literature, 107, pp. 507-38.
2. Monetary and Portfolio Balance Models of Exchange Rate Determination
** Hallwood & MacDonald, Chapters 9-11.
* De Grauwe, Chapters 6-7.
Dornbusch, R., 1976, "Expectations and Exchange Rate Dynamics," Journal of Political Economy, 84(6), pp. 1161-86.
* Frankel, J.A. and A.K. Rose, 1995, "Empirical Research on Nominal Exchange Rates," Chapter 33 in Handbook of International Economics.
3. Foreign Exchange Market Efficiency
** Hallwood & MacDonald, Chapters 12-13.
De Grauwe, Chapter 9.
* Lewis, K.K., 1995, "Puzzles in International Financial Markets," Chapter
37 in Handbook of International Economics.
C. Exchange Rate Regimes, Currency Crises, and Speculative Attacks (3-4 weeks)
1. Choice of Exchange Rate Regime
** De Grauwe, Chapters 3-4.
Baxter, M. and A. Stockman, 1989, "Business Cycles and the Exchange Rate Regime," Journal of Monetary Economics, 23, pp. 377-400.
*Fischer, S., 2001, "Distinguished Lecture on Economics in Government - Exchange Rate Regimes: Is the Bipolar View Correct?" Journal of Economic Perspectives, Spring, pp. 3-24.
Friedman, M., 1953, "The Case for Flexible Exchange Rates," in: Essays in Positive Economics, Chicago: University of Chicago Press.
* Garber, P.M. and L.E.O. Svensson, 1995, "The Operation and Collapse of Fixed Exchange Rate Regimes," Chapter 36 in Handbook of International Economics.
McKinnon, R. 1993, "Why Floating Exchange Rates Fail: A Reconsideration of the Liquidity Trap," Chapter 21 in P.K. Das (ed.), International Finance: Contemporary Issues, London: Routledge.
* Obstfeld, M. and K. Rogoff, 1995, "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, Fall, pp. 73-96.
Tornell, A. and A. Velasco, 1995, "Fixed versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?" NBER Working Paper # 5108.
2. Models of Currency Crises and Speculative Attacks
** Hallwood & MacDonald, Chapter 14.
* Agénor, P.-R. and R.P. Flood, 1994, "Macroeconomic Policy, Speculative Attacks, and Balance of Payments Crises," Chapter 8 in F. Van der Ploeg (ed.), The Handbook of International Macroeconomics, Cambridge: Basil Blackwell.
Aghion, P., P. Bacchetta, and A. Banerjee, 2000, "A Simple Model of Monetary Policy and Currency Crises," European Economic Review, 44, pp. 728-38.
Chang, R. and A. Velasco, 2001, "A Model of Financial Crises in Emerging Markets," Quarterly Journal of Economics, 126, pp. 489-517.
Christiano, L.J., C. Gust, and J. Roldos, 2002, "Monetary Policy in a Financial Crisis," NBER Working Paper #9005.
Kaminsky, G. and C. Reinhardt, 1999, "The Twin Crises: The Causes of Banking and Balance of Payments Problems," American Economic Review, 89, pp. 473-500.
Krugman, P., 1979, "A Model of Balance of Payments Crises," Journal of Money, Credit, and Banking, 11, pp. 311-25.
Krugman, P., 1996, "Are Currency Crises Self-Fulfilling?" NBER Macroeconomics Annual, Cambridge: MIT Press.
3. Exchange Rate Target Zones
** Hallwood & MacDonald, Chapter 15.
De Grauwe, Chapter 10.
Ito, T., 1993, "Was There a Target Zone?" Chapter 20 in P.K. Das (ed.), International Finance: Contemporary Issues, London: Routledge.
Krugman, P., 1991, "Target Zones and Exchange Rate Dynamics," Quarterly Journal of Economics, 116, pp. 669-82.
* Svensson, L.E.O., 1992, "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, 6, pp. 119-144.
Sarno, L. and M.P. Taylor, 2001, "Official Intervention in the Foreign
Exchange Market: Is It Effective and, If So, How Does It Work?" Journal
of Economic Literature, September, pp. 839-68.
D. Models of the Current Account (2-3 weeks)
1. Monetary Approach to Balance of Payments
** Hallwood & MacDonald, Chapter 8.
Taylor, A.M., 2002, "A Century of Current Account Dynamics," NBER Working Paper #8927.
2. Intertemporal Approach to Current Account
* De Grauwe, Chapter 8.
* Obstfeld & Rogoff, Chapters 1-3.
** Obstfeld, M. and K. Rogoff, 1995, "The Intertemporal Approach to the Current Account," Chapter 34 in Handbook of International Economics.
Sen, P., 1994, "Savings, Investment, and the Current Account," Chapter
15 in F. Van der Ploeg (ed.), The Handbook of International Macroeconomics,
Cambridge: Basil Blackwell.
E. International Monetary System (2-3 weeks)
1. History and Controversies
** Hallwood & MacDonald, Chapters 16-17.
Reinhart, C.M. and K.S. Rogoff, 2002, "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Paper #8963.
2. Reform Issues
** Hallwood & MacDonald, Chapter 24.
Bordo, M.D. and A.P. Murshid, 2002, "Globalization and Changing Patterns in the International Transmission of Shocks in Financial Markets," NBER Working Paper # 9019.
Eichengreen, B., 1999, Toward a New International Financial Architecture: A Practical Post-Asia Agenda, Washington, DC: Institute for International Economics.
Eichengreen, B., 1994, "History of the International Monetary System: Implications for Research in International Macroeconomics and Finance," Chapter 6 in F. Van der Ploeg (ed.), The Handbook of International Macroeconomics, Cambridge: Basil Blackwell.
* Fischer, S., 1999, "On the Need for an International Lender of the Last Resort," Journal of Economic Perspectives, Fall, pp. 85-104.
Kenen, P.B., 2001, The International Financial Architecture: What's New? What's Missing?, Washington, DC: Institute for International Economics.
Mendoza, E.G., 2002, "Why Should Emerging Economies Give up National Currencies: A Case for 'Institutions Substitution'," NBER Working Paper #8950.
* Obstfeld, M. and K. Rogoff, 2000, "Do We Really Need a New Global Monetary Compact?" NBER Working Paper #7864.
* Rogoff, K., 1999, "International Institutions for Reducing Global
Financial Instability," Journal of Economic Perspectives, Fall,
pp. 21-42.