Economics 241 B:
Advanced International Finance II
Winter 2005
Doireann Fitzgerald
Course description
Economics 241 is a three-quarter graduate sequence covering topics in international finance and open economy macroeconomics.
Economics 241B is the second course in the sequence. The topics covered in this part of the sequence include money and exchange rates under flexible prices, classic sticky-price models of exchange rates, “New open economy macroeconomics,” and aspects of trade and macroeconomics. The material covered mixes theory and empirics. The course is intended to prepare students to undertake independent research in these areas.
Meeting times
Monday and Wednesday 5pm – 6.45pm, Social Sciences I 149
Professor’s contact
info
Office location: E2 Building Room 465
Office hours: Wednesday 9.30am – 10.30am or by appointment
Email: dfitzger at ucsc.edu
Assessment
Three problem sets (20% each), an in-class presentation (20%) and a take-home exam (20%). The problem sets and the take-home exam involve reproducing and extending theoretical and empirical results from papers in the field. There is also a referee report component to some of these exercises. The in-class presentation will be a short presentation (30 minutes) of a recent paper (selected by the instructor). Further guidelines will be distributed with the assignments.
Course text and
readings
Required readings are listed for each class (starred). Several readings are taken from the required text, Obstfeld and Rogoff’s Foundations of International Macroeconomics (OR). Additional readings are also listed, and links given where possible. Links to the UCSC library journal search page indicate that the relevant journal and year is available through that link.
Course webpage:
This syllabus will be continuously updated on the course webpage:
http://ic.ucsc.edu/~dfitzger/econ241b/
Course outline
Week 1.
1. Wednesday 5th January: Introduction. Stylized facts about exchange rates. Flexible-price exchange rate models I.
* OR Sections 8.2 and 8.4.1
* Jeffrey Frankel and Andrew Rose (1995), “Empirical Research on Nominal Exchange Rates,” Handbook of International Economics v.3, Gene Grossman and Kenneth Rogoff (eds.)
Charles Engel and Kenneth West (1994), “Exchange Rates and Fundamentals,” Journal of Political Economy forthcoming
Week 2.
2. Monday 10th January: Flexible-price exchange rate models II.
* OR Section 8.3
Kiminori Matsuyama, Nobuhiro Kiyotaki and Akihiko Matsui (1993), “Towards a Theory of International Currency,” Review of Economic Studies 60, p. 283-307.
3. Wednesday 12th January: Flexible-price exchange rate models III.
* OR Section 8.7
* Alan Stockman (1980), “A Theory of Exchange Rate Determination,” Journal of Political Economy 88, p. 673-98.
Robert Lucas (1982), “Interest Rates and Currency Prices in a Two-Country World,” Journal of Monetary Economics 10, p. 335-59
Alan Stockman (1987), “The
Equilibrium Approach to Exchange Rates,” Federal Reserve Bank of
Week 3.
Monday 14th
January:
4. Wednesday 19th January: Flexible-price exchange rate models IV.
* Fernando Alvarez, Andrew Atkeson and Patrick J. Kehoe (2002), “Money, interest rates, and exchange rates in endogenously segmented markets,” Journal of Political Economy 110 (1), p. 73-112.
Fernando Alvarez, Andrew Atkeson and Patrick J. Kehoe
(2003), “Time-Varying
Risk, Interest Rates and Exchange Rates in General Equilibrium,” Federal
Reserve Bank of
Week 4.
5. Monday 24th January: Dornbusch sticky-price exchange rate model and empirical tests.
* OR Sections 9.2 and 9.3
Rudiger Dornbusch (1976), “Expectations and Exchange Rate Dynamics,” Journal of Political Economy 84 (6), p. 1161-1176
Kenneth Rogoff, "Dornbusch’s
Overshooting Model After Twenty-Five Years," IMF Staff Papers
49, Special Issue, 2002, pp. 1-35. ).
Richard Meese and Kenneth Rogoff (1983) “Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?” Journal of International Economics 14, p. 3-24.
Richard Meese and
Kenneth Rogoff (1983), “The Out-of-Sample Failure of Empirical Exchange Rate
Models: Sampling Error or Misspecification?” in Jacob Frenkel (ed.), Exchange Rates and
International Macroeconomics (NBER and
First assignment due
6. Wednesday 26th January: Currency crises I.
* OR Section 8.4.2
Robert Flood and Peter Garber (1984), “Collapsing Exchange Rate Regimes: Some Linear Examples,” Journal of International Economics 17, p. 1-13
Paul Krugman (1979), “A Model of Balance of Payments Crises,” Journal of Money, Credit, and Banking 11, p. 311-325.
* Maurice Obstfeld (1996), “Models of Currency Crises with Self-Fulfilling Features,” European Economic Review 40, p. 1037-47
Week 5.
7. Monday 31st January: Currency crises II.
* Stephen Morris and Hyun Song Shin (1998), “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks,” American Economic Review 88 (3), p. 587-596.
For a correction, see:
Frank Heinemann, "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review 90 (March 2000), 316-18
* Andrew Atkeson, Discussion of Morris and Shin
8. Wednesday 2nd February: New Open Economy Macro I: A 2-period sticky-price model
* Corsetti, Giancarlo and Paolo Pesenti (2001), “Welfare and macroeconomic interdependence,” Quarterly Journal of Economics 116 (2) pp 421-445
* Lane, Philip (2001), “The new open economy macroeconomics: A survey,” Journal of International Economics 54 pp 235-266
Week 6.
9. Monday 7th February: New Open Economy Macro II: Linear-quadratic sticky-price models with dynamics, and the analysis of monetary and exchange rate policy
* OR Chapter 10
* Clarida, Richard, Jordi Gali and Mark Gertler (2001) “Optimal monetary policy in closed versus open economies: An integrated approach” American Economic Review Papers and Proceedings 91 (2), pp. 248-252.
* Gali, Jordi and Tommaso Monacelli (2002), “Monetary policy and exchange rate volatility in a small open economy,” NBER working paper 8905.
Second assignment due
10. Wednesday 9th February: New Open Economy Macro III: Limitations of the theoretical framework
* Fabio Ghironi (2003), “Macroeconomic interdependence
under incomplete markets,”
* Schmitt-Grohe, Stephanie and Martin Uribe (2003), “Closing small open economy models,” Journal of International Economics 61, pp. 163-185
* Obstfeld, Maurice and Kenneth Rogoff (2000), “New directions for stochastic open economy models,” Journal of International Economics 50, pp. 117-153
Week 7.
11. Monday 14th February: New Open Economy Macro IV: Empirical tests and modifications of the framework
*
* Bergin, Paul (2002), “Putting the ‘New open economy macroeconomics’ to a test,” UC-Davis, mimeo
Bergin, Paul and Robert Feenstra (2001), “Pricing-to-market, staggered contracts and real exchange rate persistence,” Journal of International Economics 54, pp. 333-359
Tille, Cedric (2001), “The role of consumption substitutability in the international transmission of shocks,” Journal of International Economics 53 (2) pp. 421-4
12. Wednesday 16th February: Recent developments: The current account and exchange rates
* Pierre-Olivier Gourinchas
and Helene Rey (2003), “International
Financial Adjustment,” mimeo
* Philip Lane and Gian-Maria
Milesi-Ferretti (2004), “Financial
Globalization and Exchange Rates,” mimeo
Week 8.
Monday 21st
February:
13. Wednesday 23rd February: Trade and macroeconomics I. Recent developments – trade and exchange rates
* Doireann Fitzgerald, “A Gravity View of Exchange Rate Disconnect,” mimeo
Jonathan Eaton and Samuel Kortum, “Technology, Geography and Trade,” Econometrica 70 (5), p. 1741-1779
James Anderson and Eric van Wincoop (2003), “Gravity With Gravitas,” American Economic Review 93, p. 170-192
Third assignment due
Week 9.
14. Monday 28th February: Trade and macroeconomics II. Specialization and development
* Sebnem Kalemli-Ozcan, Bent E. Sorensen and Oved Yosha (2003), “Risk-Sharing and Industrial Specialization: Regional and International Evidence,” American Economic Review
* Miklos Koren and Silvana Tenreyro (2004), “Diversification and Development,” mimeo
* Miklos Koren and Silvana Tenreyro (2004), “Technological Diversification,” mimeo
15. Wednesday 2nd March: Trade and macroeconomics III. Trade and growth
*
* Acemoglu, Daron and Jaume Ventura (2002), “The world income distribution,” Quarterly Journal of Economics 117, pp. 659-694
Alejandro Cunat and Marco Maffezzoli (2004), “Neoclassical Growth and Commodity Trade,” Review of Economic Dynamics 7 (3), p. 707-736.
Andrew Atkeson and Patrick J. Kehoe (2000), “Paths of Development
for Early and Late Bloomers in a Dynamic Hecksher-Ohlin Model,” Federal
Reserve Bank of
Week 10.
16. Monday 7th March: In-class presentations
17. Wednesday 9th March: In-class presentations
Week 11.
18. Monday 14th March: In-class presentations
Friday 18th March: Take-home exam is due. Here is the data for the exam. If you use Stata 7 you will need the data in Stata 7 format. Two papers you may find useful are:
James Anderson and Eric van Wincoop (2003), “Gravity With Gravitas,” American Economic Review 93, p. 170-192
J.M.C. Santos Silva and Silvana Tenreyro (2004), “The Log of Gravity,” mimeo