ECO 7716--International Money
Dr. Cem Karayalcin
Office Hours: T & Th 10:00-11:00am
Tentative Syllabus
This course is a graduate-level introduction to the main issues in modern open economy macroeconomics and finance. The topics to be covered (with varying degrees of depth of coverage, of course) include intertemporal consumption and investment, government spending and budget deficits, international capital market integration, inflation and seignorage, real and nominal exchange rate determination, determination of the current account, etc.
Most of the time we will be using discrete time dynamic models, so you may want to brush up on your knowledge of the relevant techniques. Two good and relatively easy books that deal with this topic is Chiang's Fundamental Methods of Mathematical Economics and Dixit's Optimization in Economic Theory.
The textbook for the course is Foundations of International Macroeconomics (FIM) by Maurice Obstfeld and Kenneth Rogoff. This book is available from the University Bookstore. We will use several chapters of it. Students are also expected to read a few chapters by themselves and refresh their memory of some fundamental macroeconomic concepts. As you will see below, in addition to the chapters in the textbook, you are strongly recommended to read additional articles many of which contain the classic expositions of the issues we will discuss.
There will be two midterm exams and one final exam, with respective weights of 20%, 30%, and 40%. Occasional homeworks and class participation carry a weight of 10%.
PLAN OF THE COURSE
1. Intertemporal Trade and the Current Account Balance
Ch. 1, FIM
Karayalcin, Cem (1996), "Stockmarkets, adjustment costs, and international transmission of shocks" Economica, 599-610.
2. Dynamics of Small Open Economies
Ch. 2, FIM
Sachs, J. (1981), "The current account in the macroeconomic adjustment in the 1970's," Brookings Papers on Economic Activity 1: 201-268.
Sachs, J. (1982), "The current account in the macroeconomic adjustment process," Scandinavian Journal of Economics 84: 147-159.
Blanchard, Olivier J. and Stanley Fischer (1990), Lectures on Macroeconomics, MIT Press.
Karayalcin, Cem (1994), "Adjustment costs in investment, time preferences, and the current account," Journal of International Economics 37: 81-95.
3. Fiscal Policy and the Current Account
Ch. 3, FIM
Feldstein, Martin, and Charles Horioka (1980), "Domestic savings and international capital flows," Economic Journal 90: 314-329.
Buiter, Willem (1981), "Time preference and international lending and borrowing in an overlapping-generations model," JPE 89: 769-97.
Obstfeld, Maurice (1986), "Capital mobility in the world economy: Theory and evidence," Carnegie-Rochester Conference Series on Public Policy (Spring) 55-104.
Karayalcin, Cem (1995), "Capital income taxation and welfare in a small open economy," Journal of International Money and Finance 14: 785-800.
Karayalcin, Cem (1995), "Government spending and cyclical adjustment in a small open economy," Journal of Economic Integration 10: 454-474.
Karayalcin, Cem (1996), "Redistributive Taxation in a Small Open Economy," Canadian Journal of Economics, XXIX: 688-698.
4. The Real Exchange Rate and the Terms of Trade
Ch. 4, FIM
Dornbusch, Rudiger (1983), "Real interest rates, home goods, and optimal external borrowing," JPE 91: 141-153.
Obstfeld, Maurice (1982), "Aggregate spending and the terms of trade: Is there a Laursen-Metzler Effect?" QJE 97: 251-270.
Sen, Partha (1994), "Savings, investment, and the current account," in Frederick van der Ploeg, ed., The Handbook of International Macroeconomics, Oxford, Basil Blackwell.
Karayalcin, Cem (1995), "Heterogeneous households, the distribution of wealth, and the Laursen-Meztler effect" Review of International Economics 3: 86-103.
5. Uncertainty and International Capital Markets
Ch. 5 FIM
Turnovsky, Stephen (1995), Methods of Macroeconomic Dynamics, Ch. 15, MIT Press
Svensson, Lars (1988), "Trade in risky assets" AER 78: 375-394.
Obstfeld, Maurice (1994), "Risk taking, global diversification, and growth," AER 85: 1310-1329.
Devereux, Michael and Gregor Smith (1994), "International risk sharing and economic growth," IER 35: 535-550.
Karayalcin, Cem, K. McCollister and Devashish Mitra (2002) “Infrastructure, Returns to Scale and Sovereign Debt”, Journal of International Trade and Economic Development 11:267-278 (2002).
Karayalcin, Cem and K. McCollister (2005) “Income distribution, sovereign debt and public investment,” Economics and Politics, forthcoming.
6. Money and Exchange Rates under Flexible Prices
Ch. 8, FIM
Frenkel, Jacob (1976), "A monetary approach to the exchange rate: Doctrinal aspects and empirical evidence," ScJE 78: 200-224.
Calvo, Guillermo (1978), "On the time inconsistency of optimal policy in a monetary economy," Econometrica 46: 1411-1428.
Krugman, Paul (1979), "A model of balance of payment crises," JMCB 11: 311-325.
7. Basic open Economy Models of Nominal Price Rigidities
Ch. 9, FIM
Fleming, Marcus (1962), "Domestic financial policies under fixed and floating exchange rates," IMF Staff Papers 9: 369-379.
Mundell, Robert (1963), "Capital mobility and stabilization policy under fixed and flexible exchange rates," CJE&PS 29: 475-485.
Mundell, Robert (1963), "A reply: Capital mobility and size," CJE&PS 30: 421-431.
Dornbusch, Rudiger (1976), "Expectations and exchange rate dynamics," JPE 84: 1161-1176.
8. Imperfections in Capital Markets
Ch. 6, FIM
Sachs, Jeffrey (1984), Theoretical Issues in International Borrowing, Princeton Studies in International Finance 54.
Bulow, Jeremy and Kenneth Rogoff (1989), "Sovereign debt: Is to forgive to forget?" AER 79: 43-50.
Ozler, Sule (1993), "Have commercial banks ignored history?" AER 83: 608-620.
Cole, Harold and Patrick Kehoe (1995), "The role of institutions in reputation models of sovereign debt," JME 35: 45-64.
9. Sticky Price Models of Exchange Rate Determination
Ch. 10, FIM
Obstfeld, Maurice and Kenneth Rogoff (1995), "Exchange rate dynamics redux," JPE 103: 624-660.
Svensson, Lars and Sweder van Wijnbergen (1989), "Excess capacity, monopolistic competition, and international transmission of monetary disturbances," EJ 99: 785-805.