Economics 241 B : Advanced International Finance II

Winter 2004

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 “New open economy macroeconomics,”  stochastic open-economy models, international risk-sharing, incompleteness in international financial markets, growth in open economies and international real business cycles. 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 II 137

 

Professor’s contact info

Office location:

Office hours: Wednesday 11.30am – 12.30pm or by appointment

Email: dfitzger at ucsc.edu

 

Assessment

Three short papers. Each of these will involve reproducing and extending theoretical and/ or empirical results in a paper in the field. There will also be a referee report component to these exercises. Further guidelines will be distributed with the assignments.

 

Course text and readings

The text is Foundations of International Macroeconomics (OR). Required readings are listed for each class (starred) up to 26th January. Some additional readings are also listed. This syllabus will be continuously updated on the course webpage. A more comprehensive reading list for each topic will also be provided on the course webpage:

 

http://ic.ucsc.edu/~dfitzger/econ241b/

 

Course outline

Week 1.

Monday 5th January: Introduction. 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

 

Wednesday 7th January: 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.

 

Week 2.

Monday 12th January: New Open Economy Macro III: Limitations of the theoretical framework

 

* Fabio Ghironi (2003), “Macroeconomic interdependence under incomplete markets,” Boston College, mimeo

 

* 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

 

Wednesday 14th January: New Open Economy Macro IV: Empirical tests and modifications of the framework

 

* Chari, V. V., Patrick Kehoe and Ellen McGrattan (2002), “Can sticky-price models generate volatile and persistent real exchange rates?” FRB Minneapolis Staff Report 277

 

* 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

 

 

Week 3.

Monday 19th January: Holiday – no class.

 

Wednesday 21st January: Complete financial markets I: Arrow-Debreu

 

* OR Ch 5 pp. 269-299

 

Week 4.

Monday 26th January: Complete financial markets II: International portfolio diversification and asset pricing

 

* OR Ch 5 pp. 300-335

 

* Lucas, Robert (1982), “Interest rates and currency prices in a two-country world,” Journal of Monetary Economics 10 (November) pp. 335-360

 

Wednesday 28th January: Complete financial markets III: The consumption correlations puzzle and the home bias puzzle

 

* Lewis, Karen (1996), “What Can Explain the Apparent Lack of Consumption Risk Sharing?” Journal of Political Economy 104 pp 267-297

 

* Lewis, Karen (1999), “Trying to Explain Home Bias in Equities and Consumption,” Journal of Economic Literature 37 pp 571-608

 

* Baxter, Marianne and Urban Jermann (1997), “The international diversification puzzle is worse than you think,” American Economic Review 87, pp 170-180

 

Lewis, Karen, “Puzzles in International Financial Markets,” Handbook of International Economics Chapter 37

 

First assignment due

 

Week 5.

Monday 2nd February: Complete financial markets IV: How big are the gains to trade across states?

 

* Lewis, Karen “Why Do Stocks and Consumption Imply Such Different Gains from International Risk-Sharing,” Journal of International Economics 52 pp 1-35

 

Davis, Steven Jeremy Nalewaik and Paul Willen (2001), “On the Gains to International Trade in Risky Financial Assets,” NBER Working Paper 7796

 

Tesar, Linda (1995), “Evaluating the Gains from International Risk-Sharing,” Carnegie-Rochester Conference Series on Public Policy

 

Obstfeld, Maurice (1994), “Risk-Taking, Global Diversification and Growth,” American Economic Review, December

 

* Sebnem Kalemli-Ozcan, Bent E. Sorensen and Oved Yosha (2003), “Risk-Sharing and Industrial Specialization: Regional and International Evidence,” American Economic Review

 

Wednesday 4th February: Incomplete financial markets I. Sovereign risk and insurance aspects of debt

 

* OR Ch. 6 pp. 349-379

 

Eaton, Jonathan and Mark Gersovitz (1981), “Debt with potential repudiation: Theory and estimation,” Review of Economic Studies 48, pp. 289-309

 

Eaton, Jonathan and Raquel Fernandez (1995), “Sovereign Debt,” Handbook of International Economics Chapter 39

 

Week 6.

Monday 9th February: Incomplete financial markets II. Sovereign risk and insurance aspects of debt

Rescheduled for Friday 6th February 5pm - 6.45pm

 

* Bulow, Jeremy and Kenneth Rogoff (1989), “Sovereign debt: Is to forgive to forget?” American Economic Review 79, pp. 43-50

 

Kletzer, Kenneth and Brian Wright (2000), “Sovereign debt as intertemporal barter,” American Economic Review 90, pp. 621-639

 

Guest lecturer: Manuel Amador, Stanford GSB

 

Amador, Manuel (2003), “A political economy model of sovereign debt repayment,” mimeo

 

Wednesday 11th February: Incomplete financial markets III. Sovereign risk and investment

 

* OR Ch. 6 pp. 379-401

 

Bulow, Jeremy and Kenneth Rogoff (1990), “Cleaning up third world debt without getting taken to the cleaners,” Journal of Economic Perspectives 4, pp. 31-2

 

Bulow, Jeremy and Kenneth Rogoff (1988), “The buyback boondoggle,” Brookings Papers on Economic Activity 2, pp. 675-98

 

Week 7.

Monday 16th February: Holiday – no class.

 

Wednesday 18th February: Incomplete financial markets IV. Asymmetric information

 

* OR Ch. 6 pp. 401-419

 

Gertler, Mark and Kenneth Rogoff (1990), “North-South lending and endogenous capital market inefficiencies,” Journal of Monetary Economics 26, pp. 245-66

 

Second assignment due

 

Week 8.

Monday 23rd February: Incomplete financial markets V. Frictions in financial markets

 

* Portes, Richard and Helene Rey (2003), “The determinants of cross-border equity flows,” mimeo

 

* Martin, Philippe and Helene Rey (2003), “Financial super-markets: Size matters for asset trade,” mimeo

 

* Obstfeld, Maurice and Kenneth Rogoff (2000) “The six major puzzles in international economics: Is there a common cause?” NBER Macroeconomics Annual pp. 339-389

 

Lane, Philip and Gian-Maria Milesi Ferretti (2003) “International investment patterns,” mimeo

 

Wednesday 25th February: Incomplete financial markets VI. Empirical evidence on sovereign debt

 

* Rose, Andrew (2002), “One reason countries pay their debts: Renegotiation and international trade,” NBER Working paper 8853

 

* Rose, Andrew and Mark Spiegel (2002), “A gravity model of sovereign lending: Trade, default and credit,” NBER Working paper 9285

 

Week 9.

Monday 1st March: Growth and the open economy I.

 

* Lucas, Robert (1990) “Why doesn’t capital flow from rich to poor countries?” American Economic Review 80, pp. 92-96

 

* Gourinchas, Pierre-Olivier and Olivier Jeanne (2003), “The elusive benefits from international financial integration,” mimeo

 

Reinhart, Carmen and Kenneth Rogoff (2004), “Serial default and the “paradox” of rich to poor capital flows,” NBER Working paper 10296

 

Alfaro, Laura, Sebnem Kalemli-Ozcan and Vadym Volosovych (2003), “Why doesn’t capital flow from rich to poor countries: An empirical investigation,” mimeo

 

Wednesday 3rd March: Growth and the open economy II.

 

* Ventura, Jaume (1997) “Growth and Interdependence,” Quarterly Journal of Economics 112, pp. 57-84

 

* Acemoglu, Daron and Jaume Ventura (2002), “The world income distribution,” Quarterly Journal of Economics 117, pp. 659-694

 

Week 10.

Monday 8th March: Growth and the open economy III.

 

Cuñat, Alejandro and Marco Maffezzoli (2003), “Neoclassical growth and commodity trade,” mimeo

 

Cuñat, Alejandro and Marco Maffezzoli (2003), “The generalized neoclassical growth model,” mimeo

 

Wednesday 10th March: Growth and the open economy IV.

 

Grossman, Gene and Elhanan Helpman (1991) Innovation and growth in the global economy, Cambridge MA: MIT Press, Ch. 2,3, 9

 

Third assignment due