OPEN MACROECONOMICS:Theory and Policy

3d Module, 2002/2003

Professors: Kirill Sosunov (office hours: 3:00 - 5:00 p.m., office 1721-13)

TA: Konstantin Styrin, KStyrin@cefir.ru

Course Description

The course covers theoretical topics of real and nominal exchange rate and current account fundamentals behavior under perfect capital mobility various price-setting rules (flexible prices and nominal rigidities). The second part gives a quick review of policy issues, which attract a substantial attention from both economists and policymakers in the recent years. These include theory and evidence of exchange rate based stabilizations, currency crises, sovereign debt management, and reform of the international financial system. The course ends with the discussion of exchange rate determination and macroeconomic policy in transition economies.

There are no prerequisites for the course, however, familiarity with International Trade Theory, and knowledge of material covered in the International Finance Class by Professor Branson will be a plus.

There going to be several problem sets assigned on irregular basis. Problem seta will constitute 20% of the final grade. The remaining part will be accounted for by the final exam.

Reading list:

(OR) Obstfeld M, and K. Rogoff, Foundations of International Macroeconomics, The MIT Press.

Part 1: Basic Open Economy Models (To be covered in the 3^rd module)

1. Intertemporal Open Economy Models
• (OR) Chapter 1-3.
• Obstfeld M., and K. Rogoff, “The Intertemporal Approach to the Current Account”, in the Handbook for International Economics, Vol.3, Ch.34
1. Terms of Trade and Real Exchange Rate and tradable-nontradable goods framework
• Dornbusch R., S. Fisher, and P. Samuelson, “Comparative Advantage, Trade and Payments in Ricardian Model with Continuum of Goods”, American Economic Review, Dec. 1977; also in Exchange Rate and Inflation, Chapter 14
• (OR) Chapter 4
2. Uncertainty and Financial markets (if time allows)
• Arrow-Debreu model of trade across random states of nature
• International portfolio diversification
• Consumption CAPM
• (OR) Chapter 5
1. Macroeconomic Policy In an Open Economy.

II. Monetary Policy Under Nominal Price Rigidities

• (OR) Chapter 9

 

Part 2: Policy Issues (To be covered in the 5^th module)

1. Money, Wages and Employment

• Dornbusch R., S. Fisher, and P. Samuelson, “Comparative Advantage, Trade and Payments in Ricardian Model with Continuum of Goods”, American Economic Review, Dec. 1977; also in Exchange Rate and Inflation, Chapter 14
• Dornbusch, R., “The Latin Triangle”
2. Inflation Stabilization and Credibility Issues
• Calvo G., and C.Vegh, “Inflation Stabilization and BOP Crises in Developing Countries, mimeo, 1997
• Calvo G. and C.Vegh, “Exchange-Rate Based Stabilization under Imperfect Credibility”, in Calvo G., Money, Exchange Rates and Output, Chapter 18.
• Hamann A., “Exchange-Rate-Based Stabilization: A Critical Look at the Stylized Facts”, IMF Working Paper,WP/99/132.
• Kaminsky, G. and L.Leonardo, “High Real Interest Rates in the Aftermath of Disinflation: Is it a Lack of Credibility?”, Journal Of Development Economics, February 1998, 55(1), pp.91-214
2. Currency Crisis
• Floot R., and N.Marion, “Perspectives on the Recent Currency Crisis Literature”, IMF Working Paper, WP/98/130
• (OR) pp. 558-565
• Krugman P., “Balance sheets, the transfer problem, and financial crises”, web.mit.edu/krugman/www.
• Eichengreen B., Rose A., and C.Wyplosz, “Speculative Attacks on Pegged Exchange Rates: an Empirical Exploration with Special Reference to the European Monetary System”, NBER Working Paper No.4898, October 1994.
• Kaminsky G., S.Lizondo, and C.Reinhart, “Leading Indicators of Currency Crises”, IMF Stuff Papers, Vol.5, No.1, March 1998, pp.1-48.
• Kaminsky G., and C.Reinhart, “The Twin Crises: The Causes of Banking and Balance-of Payments Problems”, forthcoming in American Economic Review.
• Kaminsky G., and C.Reinhart, “On Crises, Contagion, and Confusion”, forthcoming in Journal of International Economics.

(Much more information on this topic you can find at Nouriel Roubini web-site www.stern.nyu.edu/~nroubini)

2. Sovereign Deb Management
• Calvo G., “Servicing the Public Debt: the Role of Expectations,” in Calvo G., Money, Exchange Rates and Output, Chapter 11.
• Krugman P., Currencies and Crises, Chapter 7-9
• (OR) Chapter 6.
• Eaton, J. and R.Fernandez, “Sovereign Debt”, in Handbook for International Economics, Vol.3, Ch.39.
• Krugman P., and M.Obstfeld, International Economics, Chapter 22.
2. Currency Substitution and Dollarization
• G.Calvo, Money, Exchange Rates and Output, Chapter 8-10.
• (OR) pp.551-554
2. Globalization, Capital Flows, and Choice of Exchange Rate Regime
• (OR) Chapter 8, Section 4-5 and Chapter 9, Section 4.
• Calvo G. “Fixed Versus Flexible Exchange Rates”, www.bsos.umd.edu/econ/ciecalvo.htm
• Obstfeld M., “International Currency Experience: New Lessons and Lessons Relearned”, Brookings Papers on Economic Activity, 1995, 119-220
• Rogoff K., “International Institutions for Reducing Global Financial Instability”, forthcoming in Journal Of Economic Perspectives, 13
• Williamson J., What Role for Currency Boards?, Institute for International Economics, 1995.
2. Real Exchange Rate in Transition Economies
• Halpern L., and C. Wyplosz, “Equilibrium Exchange Rates in Transition Economies: Further Results”,
• Wyplosz C., “Ten Years of Transformation: Macroeconomic Lessons”
• Grafe C., and C.Wyplosz, “Exchange rate in Transition Countries: Theory”, CEPR Discussion paper