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 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). Also, note that Section 3 in part reviews material you have covered in intermediate macroeconomics; see Chapters  5 and 12 of Mankiw or Chapters 12 and 19 in Dornbusch, Fischer and Startz, for example.  In Section 4 an important portion of our readings will be Joseph Stiglitz’ critique of the IMF in Globalization and its Discontents, which is available in the bookstore. 

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, debate, summary of your research project, and contributions to our listserv discussion (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 30th), submit a draft (Nov. 25th), and turn in a final product (Dec. 11). (35 percent).
4. An in-class written mid-term exam (October 16th) (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

  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.

  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/bcbs/cp3ov.pdf  (for an earlier explanation see http://www.bis.org/publ/bcbsca01.pdf )

T. Cargill, et. al., The Political Economy of Japanese Monetary Policy, MIT Press, 1997 Ch. 5 and 6. (an e-book)

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

Issues from the 1980s

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

Goldberg and Knetter, “Goods Prices and Exchange Rates:  What Have We Learned?” Journal of Economic Literature, September 1997, pp. 1243-1272.

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

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.

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.

Homework #3 - trade balance adjustment

Midterm Exam – October 16^th

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

Frankel, "Ambiguous Policy Multipliers in Theory and in Empirical Models," Empirical Macroeconomics for Interdependent Economies, Washington, DC: Brookings Institution, 1988) 

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

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.

• Sacrificing exchange rate stability?

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

• 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

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

• 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. 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

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.

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

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?

 

J. Stiglitz, Globalization and Its Discontents, Ch. 8, 9

K. Rogoff, “An Open Letter to Joseph Stiglitz,” at http://www.imf.org/external/np/vc/2003/021003.htm

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

Goldstein, IMF Structural Conditionality: How Much is Too Much? at http://www.iie.com/publications/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

E. Third World Debt

J. Sachs, “A Strategy for Efficient Debt Reduction,” Journal of Economic Perspectives, Winter 1990, pp. 19-30.

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

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

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