Mr. Mutti

Ecn 375

Carnegie 204

Fall 2005

Office Hours: 2:30-3:30 MWF or by appointment

  

 

International Finance Seminar


Seminar Scope

International financial events are closely related to a country's macroeonomic policy and prospects for political stability. We hope to have a better understanding of these interrelationships through our reading and discussion this semester.

We will cover four blocs of material in this course:

    1. An introduction to basic concepts and measures used in international finance, particularly exchange rates, risk and regulation in international financial markets, and balance of payments statistics;

    2. An analysis of factors that determine a country’s current account balance;

    3. An evaluation of how government macroeconomic policy affects a country's balance of payments, allowing for the influence of international capital flows and trade;

    4. Consideration of policy issues that affect the whole international monetary system, such as choosing an appropriate exchange rate standard, determining the proper role and scope for the IMF, or resolving sovereign debt problems.  

Textbook

There is no required textbook purchase for this course, although there is a textbook on reserve in the library to provide backup material for several of the topics we consider. It is indicated on the syllabus as CFJ (Caves, Frankel and Jones, World Trade and Payments 9th Edition). I will provide xerox chapters from a text that I co-author. Note that Section 3 call for a quick review of material you have covered in intermediate macroeconomics; see the open economy chapters in Mankiw or in Dornbusch, Fischer and Startz, for example.  In Section 4 we address several system-wide issues with respect to a country's choices of macro policies, financial crises in Asia and Russia, the advantages and disadvantages of currency blocks and the role of the IMF. Two popular accounts of many of these issues by Blustein and by Stiglitz are available in paperback. You will participate in classrom debates on these topics.

Many of our discussions will center on applications of general principles to current events, and therefore I expect you to subscribe to a newspaper (Wall Street Journal,New York Times and The Financial Times) or some comparable source of economic news for the semester.

Evaluation

Your grade will be based on the following items:

    1. Individual class participation, presentation of material from the syllabus, response to material presented by others, debate, and summary of your research project. (25 percent);
    2. Participation as a group member responsible for preparing written homework assignments (10 percent);
    3. Individual paper of 12-15 pages that extends general principles we develop in the course or that applies them to the experiences of a specific country. Clear an outline with me before you start writing (October 31st), submit a draft (Nov. 22nd), and turn in a final product (Dec. 8th). (35 percent).
    4. An in-class written mid-term exam (October 13th) (30 percent).

Course Outline

Part I. Basic Concepts

A. The Foreign Exchange Market and Exchange Rate Determination

    Important Short-Run Determinants of Exchange Rates - Capital Flows

    • What role do differences in rates of return and risk play?
    • How are distinctions between systematic and nonsystematic risk relevant?

      Material distributed on foreign exchange markets, futures markets, options markets, and relationships between them.

      Brigham and Ehrhardt, Financial Management, 10th Edition, Ch. 6 and 7

      Perold, "The Capital Asset Pricing Model," Journal of Economic Perspectives, Summer 2004, pp. 3-24.

    Levy and Lerman, "The Benefits of International Diversification in Bonds" in Kolb, The International Finance Reader , 1981 on electronic reserve at the library. Levy & Lerman

    Goodman, "Bank Lending to Non-OPEC LDCs: Are Risks Diversifiable?" Federal Reserve Bank of New York, 1981 at:
    Goodman Article

    Homework Assignment #1 - financial market operations

    Financial Crises and the Regulation of Financial Institutions

    • How can instability of the financial system be addressed?

    Secretariat of the Basel Committee on Banking Supervision, Overview of The New Basel Capital Accord, April 2003 at
    http://www.bis.org/publ/bcbs107.htm and
    http://www.bis.org/bcbs/cp3ov.pdf

    T. Cargill, et. al., The Political Economy of Japanese Monetary Policy, MIT Press, 1997 Ch. 5 and 6. (an e-book) at:
    http://www.netlibrary.com/urlapi.asp?action=summary&v=1&bookid=1403

    Important Long-Run Determinants of Exchange Rates - Trade in Goods

      • Are markets for goods well enough integrated internationally that prices in different countries must move together?

    CFJ 19.2, 19.3

Rogoff, "The PPP Puzzle," Journal of Economic Literature, June 1996, pp. 647-654 at:
http://links.jstor.org/sici?sici=0022-0515%28199606%2934%3A2%3C647%3ATPPPP%3E2.0.CO%3B2-S

B. Balance of Payments Accounting

      • Does a country's balance of payments give information that would help us predict future exchange rate changes, such as the decline of the dollar in 2004 and early 2005?
      • How is a country's overall balance related to the money supply?
      • The United States appears to pursue a policy of benign neglect with respect to its overall balance. Should other countries take the same attitude?

    CFJ: 15

    Homework #2 - evaluation of a country's balance of payments position

Part II. The Determination of the Trade Balance

A. The Role of Income and Relative Prices

    • Why may a depreciation have a delayed effect on the trade balance?
    • How is this pattern of adjustment affected by income changes?
    • What makes a balance of trade deficit sustainable?

CFJ: 16, 17

Issues from the 1980s

E. Meade, "Exchange Rates, Adjustment and the J-Curve" Federal Reserve Bulletin, 1988.

Campa and Goldberg, “Investment, Pass-through, and Exchange Rates: A Cross-Country Comparison” International Economic Review, May 1999, pp. 287-290 and 299-310 at:
http://links.jstor.org/sici?sici=0020-6598%28199905%2940%3A2%3C287%3AIPAERA%3E2.0.CO%3B2-B

P. Krugman and R. Baldwin, "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity,1987 at:
http://links.jstor.org/sici?sici=0007-2303%281987%291987%3A1%3C1%3ATPOTUT%3E2.0.CO%3B2-6

Issues from the 1990s and beyond

D. Baker, “Double Bubble:  The Implications of the Over-Valuation of the Stock Market and the Dollar,” June 2000 at http://www.cepr.net/columns/baker/double_bubble.htm

C. Mann, Is the U.S. Trade Deficit Sustainable?, IIE, 1999, Ch. 10

R. Cooper, “Is the U.S. Current Account Deficit Sustainable?  Will It be Sustained?” Brookings Papers on Economic Activity 1, 2001, pp. 217-226 at:
http://links.jstor.org/sici?sici=0007-2303%282001%292001%3A1%3C217%3AITUCAD%3E2.0.CO%3B2-A

R. McKinnon, “The International Dollar Standard and the Sustainability of the U.S. Current Account Deficit,” Brookings Papers on Economic Activity 1, 2001, pp. 227-237 at:
http://links.jstor.org/sici?sici=0007-2303%282001%292001%3A1%3C227%3ATIDSAT%3E2.0.CO%3B2-O

Homework #3 - trade balance adjustment

Midterm Exam – October 13th

Part III. Income Determination, Asset Markets and Balance of Payments Adjustments-the Outlook for a Single Country

    • What is the effect of domestic macroeconomic policy when capital is mobile internationally?

CFJ: 22, 23 and especially 25.2

Part IV. Current Issues in the International Monetary System

A. Fixed Exchange Rates, Flexible Exchange Rate and Alternatives

    • Can a country maintain a fixed rate, have an independent monetary policy, and allow international capital mobility?

CFJ: 26.5

J. Stiglitz, Globalization and Its Discontents, Ch. 1,2

S. Fischer, "Exchange Rate Regimes: Is the Bipolar View Correct?" Journal of Economic Perspectives, Spring 2001, pp. 3-24 at:
http://www.imf.org/external/pubs/ft/fandd/2001/06/fischer.htm

  • Sacrificing exchange rate stability?

Obstfeldt and Rogoff, "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, Fall 1995 at:
http://links.jstor.org/sici?sici=0895-3309%28199523%299%3A4%3C73%3ATMOFER%3E2.0.CO%3B2-F

  • Sacrifice capital mobility?

Fischer, "Capital Account Liberalization and the Role of the IMF," IMF, Sept.1997 at http://www.imf.org/external/np/speeches/1997/091997.htm

J. Stiglitz, Globalization and Its Discontents, Ch. 3 (pp.64-73), 4

S. Edwards, "How Effective are Capital Controls?" Journal of Economic Perspectives, Fall 1999, 65-84 at:
http://links.jstor.org/sici?sici=0895-3309%28199923%2913%3A4%3C65%3AHEACC%3E2.0.CO%3B2-5

E. Kaplan and D. Rodrik, "Did Malaysian Capital Controls Work?" Feb, 2001 at:
http://ksghome.harvard.edu/~drodrik/Malaysia%20controls.PDF

  • Sacrifice an independent monetary policy?

K. Schuler, "Introduction to Currency Boards," at http://users.erols.com/kurrency/intro.htm and "Basics of Dollarization," at http://users.erols.com/kurrency/basicsup.htm

N. Roubini, "The Case Against Currency Boards: Debunking 10 Myths about the Benefits of Currency Boards," at http://www.stern.nyu.edu/~nroubini/asia/CurrencyBoardsRoubini.html

B. Interpretations of the Asian Financial Crisis

Blustein, The Chastening, 2001, chapters 2-5.

Williamson, "The Years of Emerging Market Crises," Journal of Economic Literature, September 2004

C. Macroeconomic Policy in Transition Economies

J. Sachs, “Building a Market Economy in Poland,” Scientific American, March 1992

J. Stigliz, Globalization and Its Discontents, Ch. 5

D. Currency Blocs, an Intermediate Choice Between the Poles

  • When should a country peg its exchange rate relative to some currencies but let it float relative to others?
  • Were EU pre-conditions on national macroeconomic policy prior to the introduction of a single currency reasonable?

CFJ: 23.5

Feldstein, "The Political Economy of the European Economic Monetary Union," Journal of Economic Perspectives, Fall 1997, pp. 32-42 at: http://links.jstor.org/sici?sici=0895-3309%28199723%2911%3A4%3C23%3ATPEOTE%3E2.0.CO%3B2-E

Mongelli, “New Views on the Optimal Currency Area Theory:  What is EMU Telling Us?” European Central Bank Working Paper 138 at http://www.ecb.int/pub/wp/ecbwp138.pdf

Masson, Paul and Catherine Pattillo, "A Single Currency for Africa?" Finance and Development, December 2004
http://www.imf.org/external/pubs/ft/fandd/2004/12/pdf/masson.pdf

E. Stability in the International Financial System - What Role for the IMF

F. Third World Debt

J. Sachs, “A Strategy for Efficient Debt Reduction,” Journal of Economic Perspectives, Winter 1990, pp. 19-30. at:
http://links.jstor.org/sici?sici=0895-3309%28199024%294%3A1%3C19%3AASFEDR%3E2.0.CO%3B2-3

Symposium on New Bankruptcy Arrangements for Sovereign Debt, Brookings Papers on Economic Activity 1, 2002. Access at : http://muse.jhu.edu/journals/eca/

J. Bulow, First World Governments and Third World Debts, pp. 229-256 at:

J. Sachs, Resolving the Debt Crisis of Low-Income Countries, pp. 257-286 at:

M. White, Sovereigns in Distress:  Do They Need Bankruptcy? Pp. 287-320 at: