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International Macroeconomics and Finance (Econ 422)

Professor: J. Peter Ferderer
Meeting Time & Place: MWF 10:50-11:50, Carnegie 305
Office: 306 Carnegie
Office Phone: 651.696.6093
Web Page: www.macalester.edu/~ferderer/
Office Hours: Monday 3:30-4:30 p.m., Thursday 9:00-11:00 a.m. and by appointment
E-mail: ferderer@macalester.edu


"Money links countries. Its primary function is as an instrument of exchange.
Money provides a way of translating ideas into practice and of allocating
resources. The management of money is at a fundamental level concerned
with the flow of information. By itself, monetary exchange cannot produce
new ideas and technologies -- it is so to speak irrelevant to the heart of the
mechanism that drives economic development -- but it is a nerve center,
distributing ideas about how those technologies may be used. When it fails
to function properly, the course of development is impeded and the enrich-
ment of mankind halted."
-- Harold James, 1996

Content: International finance is the monetary side of international economics, in contrast to the "real side" (i.e., the theory of international rade). This branch of economics focuses on international financial markets, including the dynamics of exchange rates and foreign borrowing and lending. International macroeconomics (or open-economy macroeconomics) overlaps with international finance, but emphasizes the international determination of macroeconomic variables such as national income and the price level. This course studies international macroeconomics and finance from a historical perspective and emphasizes the interplay between the institutions ("rules of the game") which govern the international financial system and economic performance.

Prerequisites: Students must have completed Intermediate Macroeconomic Analysis (Econ 371) and Introduction to Econometrics (Econ 381) before enrolling in this course.

Readings: The textbook for this course is International Macroeconomics (2008) by Robert Feenstra and Alan Taylor (http://www.worthpublishers.com). I recommend that students purchase the split volume (International Macroeconomics) rather than the one which covers both international trade and macroeconomics (International Economics). Most of the other readings are available on the web and those that are not will be put on reserve. The reading list may be modified throughout the semester and students should consult my course web site (http://www.macalester.edu/~ferderer/International%20Finance.htm) to see these changes. The videos are intended to supplement the readings and stimulate classroom discussion.

Expectations: I have four expectations for students: a) attend all classes and be punctual, b) keep up with the reading assignments, c) be an "active learner" (e.g., question, speculate, etc.), and d) honesty (http://www.indiana.edu/~wts/pamphlets/plagiarism.shtml). I have five expectations for myself: a) set high, yet attainable, standards, b) be a fair and objective grader, c) provide organized and stimulating lectures, d) promote class discussion that facilitates active learning, and e) be available outside of class for consultation.

Grades: Final grades are based on the following:
Term Paper (25%)
Exam #1 (20%)
Exam #2 (20%)
Class Participation (15%)
Debates (10%)
Article Presentation (10%)

Given the empirical nature of the subject and the ubiquity of macro data on the web, it is strongly recommended that your term paper contain empirical analysis. To obtain an "A", the term paper must a) focus on an issue germane to international macroeconomics and finance, b) present the relevant theory, c) employ appropriate empirical techniques (e.g. econometrics and/or graphical analysis), d) display creativity, and e) be well written. You may co-author a term paper with one other student. A two-page proposal of the paper, complete with thesis question and list of references, is due on November 2 (Monday). Final drafts are due December 16 (Wednesday). No exceptions will be granted for the deadlines.

The two examines will take about one hour each and will emphasize the material covered in the textbook. Students are encouraged to work on the problems at the end of the chapters to prepare for the exams.

Daily particatpion points are assigned as follows: not present = -1, present but no contribution = 1, one good insight/question = 2, and more than one good insight/question = 3.

Two one-hour debates will be held toward the end of the semester. Students are encouraged to draw on material learned throughout the semester, but not limit themesleves to the reading list, when taking a position in the debate.

Students are required to present one article during the semester. Eligible articles are marked in red on the reading list and allocated on a first-come-first-serve-basis. To score an "A" on the presentation, students must: a) provide a well-organized and concise overview of the main ideas in the article, complete with appropriate visuals (PowerPoint recommended), b) display analytical depth, c) explain the larger context in which the article is situated, and d) generate productive classroom discussion.

Data Sets for Term Papers
General International Data
Exchange Rate Microstructure
Bank of International Settlments Data (real exchange rates, capital flows, etc.)
Travel Map Generator

  Tentative Reading List

Readings are organized from the most to least important. Chapters and page numbers are given for both the split edition of the textbook (International Macroeconomics) and the combined edition (International Economics) by Feenstra and Taylor. The latter appear in parentheses. Articles that are eligible for student presentations are preceded by a red number .

Sep. 9 (W) - Introduction
[1] Feenstra and Taylor, Ch.1 (Ch. 12).
[2] Exchange Rates and the NHL

Sep. 11 (F) - Foreign Exchange Markets
[1] Feenstra and Taylor, Ch. 2, pp. 30-41 (Ch. 13, pp. 461-83).
[2] Gallardo and Heath, "Execution Methods in Foreign Exchange Markets," BIS Quarterly Review, March 2009.
[3] Video: Bloomberg on FX Trading

Sep. 14 (M) - Interest Rate Parity
[1] Feenstra and Taylor, Ch. 2, pp. 51-66 (Ch. 13, pp. 483-97).
[2] Lothian and Wu, "Uncovered Interest Rate Parity over the Past Two Centuries," CRIF Working Paper, 2005.

Sep. 16 (W) - Purchasing Power Parity
[1] Feenstra and Taylor, Ch. 3, pp. 69-82 (Ch. 14, pp. 501-514).
[2] Landry, "The Big Mac: A Global-to-Local Look at Pricing," FRB of Dallas Economic Letters, September 2008.

Sep. 18 (F) - Long-run Determinants of the Exchange Rate
[1] Feenstra and Taylor, Ch. 3, pp. 82-112 (Ch. 14, pp. 514-44).
[2] The Case of Zimbabwe.

Sep. 21 (M) - Short-run Determinants of the Exchange Rate: The Asset Approach
[1] Feenstra and Taylor, Ch.4, pp. 117-37 (Ch. 15, pp. 549-69).
[2] Video: The Plaza Accord

Sep. 23 (W) - A Unified Model of the Exchange Rate
[1] Feenstra and Taylor, Ch.4, pp. 137-61 (Ch. 15, pp. 569-93).
[2] Wang, "Why Are Exchange Rates So Difficult to Predict?" FRB of Dallas Economic Letters, June 2008.
[3] Video: Hyperinflation Nation [1] [2] [3]

Sep. 25 (F) - Microstructure Models of Exchange Rates
[1] Evans, "Foreign Exchange Market Microstructure," New Palgrave Dictionary of Finance and Economics, 2007.
[2] Evans and Lyons, "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, February 2002.

Sep. 28 (M) - The Balance of Payments
[1] Feenstra and Taylor, Ch. 5 (Ch. 16).
[2] Gyntelberg, et al., "Highlights of International Banking and Financial Market Activity," BIS Quarterly Review, June 2009.
[3] Truman, "Four Myths about Sovereign Wealth Funds," VoxEU.org, 8/14/2008.

Sep. 30 (W) - The Balance of Payments - Quiz
[1] Feenstra and Taylor, Ch. 5 (Ch. 16).

Oct. 2 (F) - First Exam

Oct. 5 (M) - The Gains from Financial Globalization : Consumption Smoothing
[1] Feenstra and Taylor, Ch. 6 (Ch. 17).
[2] Obsfeld and Rogoff, Foundations of International Macroeconomics, Ch. 1, p. 1-14.

Oct. 7 (W) - The Gains from Financial Globalization: Efficient Investment
[1] Feenstra and Taylor, Ch.6 (Ch. 17).
[2] Obsfeld and Rogoff, Foundations of International Macroeconomics, Ch. 1, p. 14-21.
[3] Kose, et al. "Financial Globalization: A Reappraisal," IMF Staff Papers, 56 (1), 2009.

Oct. 9 (F) - The Gains from Financial Globalization: Diversification and Measuring Integration
[1] Feenstra and Taylor, Ch.6 (Ch. 17).

[2] Feldstein and Horioka, "Domestic Saving and International Capital Flows," The Economic Journal, June 1980.

Oct. 12 (M) - Explaining Integration
[1] Lothian, "Institutions, Capital Flows and Financial Integration," CRIF Working Paper, 2005.
[2] Lane and Milesi-Ferretti, "The Drivers of Financial Globalization," American Economic Review, 2008, pp. 327-32.
[3] Kumar, "Does Foreign Direct Investment Help Emerging Economies?" FRB of Dallas Economic Letters, January 2007.
[4] Neely, "An Introduction to Capital Controls," FRB of St. Louis Review, Nov/Dec. 1999.

Oct. 14 (W) - Global Imbalances: The Conventional View
[1] Feenstra and Taylor, Ch. 5, pp. 186-92 and Ch. 11, pp. 508-24 (Ch. 16 , pp. 618-24 and Ch. 22, pp. 940-56).
[2] Obstfeld and Rogoff, "The Unsustainable U.S. Current Account Position Revisited," in Current Account Imbalances, ed. by Clarida, 2007.
[3] Video: Falling Dollar

Oct. 16 (F) - Global Imbalances: The New Bretton Woods Hypothesis
[1] Dooley, Garber and Folkerts-Landau, "The Two Crises of International Economics," 2007.

Oct. 19 (M) - The Open Economy IS-LM Model
[1] Feenstra and Taylor, Ch. 7 (Ch. 18).

Oct. 21 (W) - The Open Economy IS-LM Model
[1] Feenstra and Taylor, Ch. 7 (Ch. 18).
[2] Ramanarayanan, "Ties that Bind: Bilateral Trade's Role in Syncronizing Business Cycles" FRB of Dallas Economic Letters, 2009.

Oct. 23 (F) - Student Presentations using the Open Economy IS-LM Model

Oct. 26 (M) - Exchange Rate Pass-Through and the J-Curve
[1] Feenstra and Taylor, Ch. 7.
[2] Exchange Rate Pass-Through to Import Prices, Cleveland Fed, 6/12/2008.

Oct. 28 (W) - The Exchange Rate Regime Choice
[1] Feenstra and Taylor, Ch. 8, pp. 331-59 (Ch. 19, pp. 763-90).
[2] Velde and Veracierto, "Dollarization in Argenina," 2000.
[3] Optimum Currency Areas
[4] Video: Mundell Nobel Prize Interview

Oct. 30 (F) - Fall Break: Minnesota Economic Association Conference at Hamline University (Students should attend!)

Nov. 2 (M) - Classical Gold Standard
[1] Feenstra and Taylor, Ch. 8, pp. 359-75 (Ch. 19, pp. 791-807).
[2] Bordo and Rockoff, "The Gold Standard as a 'Good Housekeeping Seal of Approval'," Journal of Economic History, June 1996.

Nov. 4 (W) - Post-WWII Floating: 1919-1926
[1] Eichengreen, Globalizing Capital, Ch. 3, pp. 45-63.
[2] Video: Hyperinflation

Nov. 6 (F) - Great Depression
[1] Feenstra and Taylor, Ch. 8, pp. 359-75 (Ch. 19, pp. 791-807).
[2] Eichengreen, Golden Fetters, Ch. 1.
[3]
Video: Great Depression
[4] Video: Devaluation

Nov. 9 (M) -Bretton Woods
[1] Feenstra and Taylor, Ch. 8, pp. 359-75 (Ch. 19, pp. 791-807).
[2] Eichengreen, "Global Imbalances and the Lessons from Bretton Woods," 2004.
[3] Video: Welcome to Bretton Woods!
[4] Video: Nixon Feels the Heat

Nov. 11 (W) - Exchange Rate Crises: Introduction
[1] Feenstra and Taylor, Ch. 9, pp. 379-413 (Ch. 20, pp. 811-845).

Nov. 13 (F) - First and Second Generation Models
[1] Feenstra and Taylor, Ch. 9, pp. 414-33 (Ch. 20, pp. 846-65).
[2] Krugman, "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, 1979, pp. 311-25.
[3] Obstfeld, "Rational and Self-Fulfilling Balance of Payments Crises," American Economic Review, 1986, pp. 72-81.

Nov. 16 (M) - Second Exam

Nov. 18 (W) -The EMS Crisis of 1992
[1] Whitt, "Monetary Union in Europe," FRB of Atlanta Economic Review, 1994.
[2] Video: Black Wednesday
[3] Video: Peso Crisis

Nov. 20 (F) - The Asian and Argentine Crises
[1] Eichengreen, "Understanding Asia's Crisis," Ch. 9 in Capital Flows & Crises.
[2] Hausmann and Velasco, "Hard Money's Soft Underbelly: Understanding the Argintine Crisis," Brookings Papers on Economic Activity, 1:2005.

Nov. 23 (M) - Twin Crises and Contagion
[1] Kaminsky and Reinhart, "The Twin Crises: The Causes of Banking and Balance-of- Payments Problems," American Economic Review, 1999, pp.474-500.
[2] Reinhart and Rogoff, "Is the 2007 Sub-prime Financial Crisis so Different? An International Historical Comparison," AER, 2008, pp. 339-44.
[3] Kaminsky, et al. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, 2003, pp. 51-74.

Nov. 25 (W) - The IMF
[1] Ragan and Subramanian, "Aid and Growth: What Does the Cross-Country Evidence Really Show," IMF WP/05/127.
[2] Video: Jamaica and the IMF
[3] Video: Iceland and the IMF
[4] Video: Africa and the IMF
[5] Video: Hungary and the IMF
[6] Video: Criticism of the IMF

Nov. 27 (F) - Thanksgiving Break

Nov. 30 (M) - The Euro
[1] Feenstra and Taylor, Ch. 10 (Ch. 21).
[2] The Economist, "Special Report: The Euro Area," 6/11/2009. (Tina)
[3] Lane, "The Real Effects of Monetary Union," Journal of Economic Perspectives, Fall 2006. (Ji)

Dec. 2 (W) - The Euro
[1] Chinn & Frankel, "The Euro May Surpass the Dollar as the Leading Internatinoal Reserve Currency" NBER WP 13909. (Aleks and Danielle)
[2] Kelton and Wray, "Can Euroland Survive?" Levy Economics Institute WP # 106, 2009. (Joe and Miles)

Dec. 4 (F)) - Monetary Aggrangements: Looking Forward
[1] Rose, A. "A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods Reversed," J. of International Money and Finance, 2007. (Josh)
[2] Edwards, "Dollarization: Myths and Realities," in The Dollarization Debate, edited by Salvatore, et al., 2003.
(Jerry and Stamo)

Dec. 7 (M) - Class Debate: Should the International Monetary Fund be abolished?

Dec. 9-14 - Term Paper Presentations (15 minuts per paper)

   

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