Mr. Mutti
Ecn 375
Carnegie 204
Spring 2002
Office Hours: 2:30-4:00 T, 10:00-11:00 TH or by appointment

International Finance Seminar

Seminar Scope

International financial events are closely related to a country's standard of living and prospects for political stability, as well as a student's job prospects. 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 the way relative prices and income determine the balance of trade;

    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 and determining the proper role and scope for IMF assistance in a world with ever-larger private capital flows.

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). Also, note that Section 3 in part reviews material you have covered in intermediate macroeconomics; see Chapters 12 and 19 in Dornbusch, Fischer and Startz, for example.

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) 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, summary of your research project, and contributions to our listserv discussion (20 percent);
    2. Participation as a group member responsible for preparing written homework assignments (5 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 (March 6), submit a draft (April 24), and turn in a final product (May 8). (35 percent).
    4. An in-class written mid-term exam (March 13) (20 percent).
    5. A take-home final exam (May 17) (20 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?

CFJ: 21

O'Brien, Global Financial Management, Ch.3 (66-74) & 4

Fieleke, "The Rise of the Foreign Currency Futures Market"

Gendreau, "New Markets in Foreign Currency Options"

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

Levy and Lerman, "The Benefits of International Diversification in Bonds" in Kolb, The International Finance Reader

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

Morck, Yeung and Yu The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements? 1999

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, The New Basel Capital Accord: An Explanatory Note, January 2001 at http://www.bis.org/publ/bcbsca01.pdf

V. Polizatto, "Building an Effective Framework for Bank Supervision" at http://www1.worldbank.org/finance/PUBS/POLIZATT/poli001d.htm

T. Cargill, et. al., The Political Economy of Japanese Monetary Policy, MIT Press, 1997 Ch. 5 and 6.

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

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 recent decline of the Argentine peso?
  • 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

Kemp, "Balance of Payments Concepts-What Do They Really Mean" Federal Reserve Bank of St. Louis, 1975.

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

Views from the 1980s

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

P. Krugman and R. Baldwin, "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity,1987.

Views from the 1990s and beyond

J. Holman, "Is the Large U.S. Current Account Deficit Sustainable?" FRBKC Economic Review, QI, 2001, pp. 5-24 at http://www.kc.frb.org/Publicat/econrev/PDF/1q01holm.pdf

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

M. Obstfeld and K. Rogoff, "Perspectives on OECD Economic Integration: Implications for U.S. Current Account Adjustment," especially pp. 22-36 at http://www.kc.frb.org/PUBLICAT/SYMPOS/2000/rogoff.pdf

Homework #3 - trade balance adjustment

Midterm Exam - March 13th

B. An Alternative Operational Approach - the IMF monetarist model of adjustment

IMF Financial Policy Workshops, Chapter 7, "The Polak Model: An Application."

C. Heterodox Objections to the IMF Orthodoxy

Taylor, "How Stabilization Can Work Better," Varieties of Stablization Experience, Clarendon Press, 1988, Ch. 5, pp. 154-163

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 25

Frankel, "Ambiguous Policy Multipliers in Theory and in Empirical Models," Financial Markets and Monetary Policy, 1995, Ch. 2

Homework #4 - interpreting a macroeconomic policy simulation

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

S. Fischer, "Exchange Rate Regimes: Is the Bipolar View Correct?" Journal of Economic Perspectives, Spring 2001, pp. 3-24.

  • Sacrificing exchange rate stability?

Obstfeldt and Rogoff, "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, Fall 1995

Dornbusch, Goldfajn and Valdes, "Currency Crises and Collapses," Brookings Papers on Economic Activity, Vol. 2, 1995, pp. 242-288.

  • Sacrifice capital mobility?

Fischer, "Capital Account Liberalization and the Role of the IMF," IMF, Sept.1997

S. Edwards, "How Effective are Capital Controls?" Journal of Economic Perspectives, Fall 1999, 65-84

E. Kaplan and D. Rodrik, "Did Malaysian Capital Controls Work?" Feb, 2001

J. Bhagwati, "The Capital Myth," Foreign Affairs, May/June 1998, pp. 7-12

  • 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. Financial Crises in Latin America and Asia

Perry and Lederman, "Financial Vulnerability, Spillover Effects, and Contagion: Lessons from the Asian Crises for Latin America," March 1998

"Emerging Asia's Sombre Era," The Economist, August 24, 1996, pp.55-56.

Dornbusch, Goldfajn and Valdes, "Currency Crises and Collapses," Brookings Papers on Economic Activity, Vol. 2, 1995, pp. 221-242

C. 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

Wyplosz, "EMU: Why and How It Might Happen," Journal of Economic Perspectives, Fall 1997

Feldstein, "The Political Economy of the European Economic Monetary Union," Journal of Economic Perspectives, Fall 1997, pp. 32-42.

"EMU: An Awfully Big Adventure," The Economist, April 11, 1998

Obstfeld, "Europe's Gamble," Brookings Papers on Economic Activity, 1997(2), also comments by Alesina

B. Eichengreen, "Is Europe an Optimum Currency Area?" European Monetary Unification: Theory, Practicie, and Analysis, 1997

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

  • Is the IMF irrelevant in a world with highly mobile capital internationally, or more necessary than ever?
  • Is it trying to do too much or not enough?

Feldstein, "Refocusing the IMF," Foreign Affairs, March/April 1998

Goldstein, The Exchange Rate System and the IMF: A Modest Agenda, Ch. , IIE, 1995

Goldstein, IMF Structural Conditionality: How Much is Too Much? at http://www.iie.com/catalog/WP/2001/01-4.pdf

Meltzer Commission, "Meltzer Commission Report," and the U.S. Treasury Response at http://www.econ.lsa.umich.edu/~alandear/topics/meltzer.html

 
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