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ECON 8423-001 International Finance

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ECON 8423-001 International Finance
UNIVERSITY OF COLORADO
Department of Economics
ECON8423
International Finance
Spring 2007
Instructor:
Martin Boileau
Office:
Office Hours:
Economics 14a
Monday and Wednesday 15:30 to 16:45
Phone:
(303) 492-2108
E-mail:
[email protected]
COURSE DESCRIPTION
Here are some stylized facts that we will seek to explain:
1. Real and nominal exchange rates are highly correlated.
2. Exchange-rate systems affect the real exchange rate.
3. Changes in both real and nominal exchange rates are persistent.
4. There are persistent deviations from the law of one price.
5. Forward exchange rates are poor and biased predictors of future spot exchange rates.
6. International differences in interest rates are large and persistent.
7. Portfolios are not internationally diversified.
8. The extent of international consumption risk-sharing is less than expected.
9. Savings and investment are highly correlated.
10. The trade balance is countercyclical.
11. Business cycles are highly correlated across countries.
12. Countries grow at different rates and do not seem to be converging.
1
EVALUATION
The assessment for this class consists of
Test: A take-home test will be distributed in class on 28 February and is due on 1 March at
16h00.
Report: You are required to write a 3-page referee report of an article in international macroeconomics. You will be presenting both the article and the report in class. The report is due
on 19 March. The presentations will take place shortly after. I must approve your choice
of article no later than 28 February.
Survey: To introduce you to recent research, you are required to write a 10 to 15-page survey of
a topic in international macroeconomics. The survey is due on 25 April. I must approve
you choice of topic and a preliminary list of papers no later than 28 February.
Final: The final examination is cumulative and will take place in Econ Room 5. Although I
believe the final will be on 7 May at 4:30 pm, it remains to be confirmed.
The tentative schedule and the grade distribution are displayed in the table below.
Evaluation
Date
%
Take Home Test
28 February
20
Report
19 March
20
Survey
25 April
20
Final
7 May 4:30pm to 7:00pm
40
TEXT
Obstfeld, M. and K. Rogoff (1996) Foundations of International Macroeconomics, Cambridge: The
MIT Press.
2
Course Outline
READING LIST
I. INTERNATIONAL FINANCIAL MARKETS AND TRADE
A. Intertemporal Trade
Feldstein, M. and C. Horioka (1980) “Domestic Saving and International Capital Flows,” Economic
Journal 90, 314–329.
Obstfeld, M. (1986) “Capital Mobility in the World Economy: Theory and Measurement,” CarnegieRochester Conference Series on Public Policy 24, 55–104.
Obstfeld and Rogoff (1996) Chapters 1 to 4.
B. Trade Across States of Nature
Cole, H. and M. Obstfeld (1991) “Commodity Trade and International Risk Sharing: How Much
Do Financial Market Matters?,” Journal of Monetary Economics 28, 3–24.
Lewis, K. (1996) “What Can Explain the Apparent Lack of International Consumption Risk Sharing?,” Journal of Political Economy 104, 267–297.
Obstfeld and Rogoff (1996) Chapters 5 and 6.
C. International Business Cycles
Backus, D., P. Kehoe and F. Kydland (1992) “International Real Business Cycles,” Journal of
Political Economy 100, 745–775.
Mendoza, E. (1991) “Real Business Cycles in a Small Open Economy,” American Economic Review
81, 797–818.
II. EXCHANGE RATES
A. Empirical Evidence on Exchange Rates
Devereux, M. (1997) “Real Exchange Rates and Macroeconomics: Evidence and Theory,” Canadian
Journal of Economics 30, 773–808.
B. Equilibrium Models of Exchange Rates
Grilli, V. and N. Roubini (1992) “Liquidity and Exchange Rates,” Journal of International Economics 32, 339–352.
Obstfeld and Rogoff (1996) Chapter 8.
C. Disequilibrium Models of Exchange Rates
Dornbusch, R. (1976) “Expectations and Exchange Rate dynamics,” Journal of Political Economy
84, 1161–1176.
3
Lane, P. (1999) “The New Open Economy Macroeconomics: A Survey,” Trinity Economic Paper
Series Paper No. 3
Obstfeld and Rogoff (1996) Chapters 9 and 10.
Obstfeld and Rogoff (1995) “Exchange Rate Dynamics Redux,” Journal of Political Economy 103,
624–660.
D. Exchange Rate Regimes
Baxter, M. and A. Stockman (1989) “Business Cycles and the Exchange Rate Regime: Some
International Evidence,” Journal of Monetary Economics 23, 377–400.
Devereux, M. and C. Engel (1998) “Fixed versus Floating Exchange Rates: How Price Setting
Affects the Optimal Choice of Exchange-Rate Regime,” mimeo University of British Columbia.
Helpman, E. (1981) “An Exploration in the Theory of Exchange Rate Regimes,” Journal of Political
Economy 89, 865–890.
Obstfeld and Rogoff (1996) Chapter 8.
III. OTHER TOPICS
A. Collapsing Regimes, Speculative Attacks, and Target Zones
Agenor, P.-R. and R. Flood (1994) “Macroeconomic Policy, Speculative Attacks, and Balance of
Payment Crises,” in F. van der Ploeg (ed.) The Handbook of International Macroeconomics,
Oxford: Basil Blackwell Ltd, 506–534.
Obstfeld and Rogoff (1996) Chapter 8.
B. International Debt
Kletzer, K. (1994) “Sovereign Immunity and International Lending,” in F. van der Ploeg (ed.) The
Handbook of International Macroeconomics, Oxford: Basil Blackwell Ltd, 506–534.
Obstfeld and Rogoff (1996) Chapter 6.
C. International Asset Pricing
Devries, C. (1994) “Stylized Facts of Nominal Exchange Rate Returns,” in F. van der Ploeg (ed.)
The Handbook of International Macroeconomics, Oxford: Basil Blackwell Ltd, 506–534.
Lewis, K. (1995) “Puzzles in International Financial Markets,” in G. Grossman and K. Rogoff
(eds.) Handbook of International Economics, vol. 3, Amsterdam: North-Holland.
D. International Growth
Barro, R. (1991) “Economic Growth in a Cross-Section of Countries,” Quarterly Journal of Economics 106, 101-121.
Obstfeld and Rogoff (1996) Chapter 7.
E. International Policy Coordination
Rogoff, K. (1985) “Can International Monetary Policy Coordination Be Counterproductive?,” Journal of International Economics 18, 199–217.
4
Extended Course Outline
TEXTS
Dixit, A. and V. Norman (1980) Theory of International Trade, London: Cambridge University
Press.
Frankel, J. and A. Razin (1992) Fiscal Policies and the World Economy, Cambridge: The MIT
Press.
Grossman, G. and E. Helpman (1991) Innovation and Growth in the Global Economy, Cambridge:
The MIT Press.
Grossman, G. and K. Rogoff (1995) Handbook of International Economics, vol. 3, Amsterdam:
North-Holland.
Jones R. and P. Kennen (1985) Handbook of International Economics, vol. 1 and 2, Amsterdam:
North-Holland.
Obstfeld, M. and K. Rogoff (1996) Foundations of International Macroeconomics, Cambridge: The
MIT Press.
Turnovsky, S. (1997) International Macroeconomic Dynamics, Cambridge: The MIT Press.
van der Ploeg, F. (1994) The Handbook of International Macroeconomics, Oxford: Basil Blackwell
Ltd.
READING LIST
I. INTERNATIONAL FINANCIAL MARKETS AND TRADE
A. Intertemporal Trade
Barro, R., G. Mankiw and X. Sala-i-Martin (1995) “Capital Mobility in Neoclassical Models,”
American Economic Review 85, 103–115.
Blanchard, O. (1985) “Debt, Deficits, and Finite Horizons,” Journal of Political Economy 93,
233–247.
Buiter, W. (1981) “Time Preference and International Lending and Borrowing in an OverlappingGenerations Model,” Journal of Political Economy 89, 769–797.
Feldstein, M. and C. Horioka (1980) “Domestic Saving and International Capital Flows,” Economic
Journal 90, 314–329.
Frankel and Razin (1992) Chapters 1, 4 and 5.
Obstfeld, M. (1986) “Capital Mobility in the World Economy: Theory and Measurement,” CarnegieRochester Conference Series on Public Policy 24, 55–104.
Obstfeld, M. and K. Rogoff (1996) “The Intertemporal Approach to the Current Account,” in G.
Grossman and K. Rogoff (eds.) Handbook of International Economics, vol. 3. Amsterdam:
North-Holland.
Obstfeld and Rogoff (1996) Chapters 1 to 3.
5
Persson, T. (1985) “Deficits and Intergenerational Welfare in Open Economies,” Journal of International Economics 19, 67–84.
Svensson, L. and A. Razin (1985) “Current Account Dynamics and the Terms of Trade: The
Harberger-Laursen-Metzler Effect,” Journal of Political Economy 91, 97–125.
Sen, P. (1994) “Savings, Investment, and the Current Account,” in F. van der Ploeg (ed.) The
Handbook of International Macroeconomics, Oxford: Basil Blackwell Ltd, 506–534.
B. Trade Across States of Nature
Cole, H. (1987) “Financial Structure and International Trade,” International Economic Review
29, 237–259.
Cole, H. and M. Obstfeld (1991) “Commodity Trade and International Risk Sharing: How Much
Do Financial Market Matters?,” Journal of Monetary Economics 28, 3–24.
Dixit, A. (1987) “Trade and Insurance with Moral Hazard,” Journal of International Economics
23, 201–220.
Lewis, K. (1996) “What Can Explain the Apparent Lack of International Consumption Risk Sharing?,” Journal of Political Economy 104, 267–297.
Obstfeld, M. (1994) “Are Industrial-Country Consumption Risk Globally Diversified?,” in L. Leiderman and A. Razin (eds.) Capital Mobility: The Impact on Consumption, Investment, and
Growth, Cambridge: Cambridge University Press.
Obstfeld and Rogoff (1996) Chapter 5.
Stockman, A. (1988) “On the Role of International Financial Markets and their Relevance for
Economic Policy,” Journal of Money, Credit, and Banking 20, 205–226.
Svensson, L. (1988) “Trade in Risky Assets,” American Economic Review 78, 375–394.
C. International Business Cycles
Backus, D. and P. Kehoe (1992) “International Evidence on the Historical Properties of Business
Cycles,” American Economic Review 82, 864–888.
Backus, D., P. Kehoe and F. Kydland (1994) “Dynamics of the Trade Balance and the Terms of
Trade: The J-Curve,” American Economic Review 84, 84–103.
Backus, D., P. Kehoe and F. Kydland (1992) “International Real Business Cycles,” Journal of
Political Economy 100, 745–775.
Baxter, M. (1995) “International Trade and Business Cycles,” in G. Grossman and K. Rogoff (eds.)
Handbook of International Economics, vol. 3. Amsterdam: North-Holland.
Baxter, M. and M. Crucini (1993) “Explaining Saving–Investment Correlations,” American Economic Review 83, 416–436.
Mendoza, E. (1991) “Real Business Cycles in a Small Open Economy,” American Economic Review
81, 797–818.
Stockman, A. and L. Tesar (1995) “Tastes and Technology in a Two-Country Model of the Business
Cycle: Explaining International Comovements,” American Economic Review 85, 168–185.
II. EXCHANGE RATES
6
A. Empirical Evidence on Exchange Rates
Abuaf, N. and P. Jorion (1990) “Purchasing Power Parity in the Long Run,” Journal of Finance
45, 157–174.
Engel, C. (1993) “Real Exchange Rates and Relative Prices: An Empirical Investigation,” Journal
of Monetary Economics 32, 35–50.
Fama, E. (1984) “Forward and Spot Exchange Rates,” Journal of Monetary Economics 23, 319–
338.
Frankel, F. and A. Rose (1995) “Empirical Research on Nominal Exchange Rates,” in G. Grossman
and K. Rogoff (eds.) Handbook of International Economics, vol. 3. Amsterdam: NorthHolland.
Froot, K. and R. Thaler (1990) “Anomalies — Foreign Exchange,” Journal of Economic Perspectives 4, 179–192.
Hodrick, R. (1987) The Empirical Evidence on the Efficiency of Forward and Futures Foreign
Exchange Markets, Chur: Harwood Academic Publishers.
Lothian, J. and M. Taylor (1996) “Real Exchange Rate Behavior: The Recent Float from the
Perspective of the Past Two Centuries,” Journal of Political Economy 104, 488–509.
Mark, N. (1990) “Real and Nominal Exchange Rates in the Short and in the Long Run: An
Empirical Investigation, Journal of International Economics 28, 115–136.
Rogoff, K. (1996) “The Purchasing Power Parity Puzzle,” Journal of Economic Literature 34,
647–688.
B. Disequilibrium Models of Exchange Rates
Beaudry, P. and M. Devereux (1995) “Money and the Real Exchange Rate with Sticky Prices and
Increasing Returns,” Carnegie-Rochester Conference Series on Public Policy 43, 55–101.
Betts, C. and M. Devereux (1996) “The Exchange Rate in a Model of Pricing to Market,” European
Economic Review 40, 1007–1021.
Dornbusch, R. (1976) “Expectations and Exchange Rate dynamics,” Journal of Political Economy
84, 1161–1176.
Lane, P. (1999) “The New Open Economy Macroeconomics: A Survey,” Trinity Economic Paper
Series Paper No. 3
Obstfeld and Rogoff (1996) Chapters 9.1 to 9.3 and 10.
Obstfeld and Rogoff (1995) “Exchange Rate Dynamics Redux,” Journal of Political Economy 103,
624–660.
C. Equilibrium Models of Exchange Rates
Hodrick, R. (1989) “Risk, Uncertainty, and Exchange Rates,” Journal of Monetary Economics 23,
433–459.
Kareken, J. and N. Wallace (1981) “On the Indeterminacy of Equilibrium Exchange Rates,” Quarterly Journal of Economics 96, 207–222.
7
Grilli, V. and N. Roubini (1992) “Liquidity and Exchange Rates,” Journal of International Economics 32, 339–352.
Lucas, R. (1982) “Interest Rates and Currency Prices in a Two-Country World,” Journal of Monetary Economics 10, 335–360.
Obstfeld, M. (1981) “Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation,” Journal of Political Economy 89, 1142–1161.
Stockman, A. (1980) “A Theory of Exchange Rate Determination,” Journal of Political Economy
88, 673–398.
Schlagenhauf, D. and J. Wrase (1995) “Liquidity and Real Activity in a Simple Open Economy
Model,” Journal of Monetary Economics 35, 431–462.
Svensson, L. (1985) “Currency Prices, Terms of Trade, and Interest Rates: A General Equilibrium
Asset-Pricing, Cash-in-Advance Approach,” Journal of International Economics 18, 17–41.
D. Exchange Rate Regimes
Helpman, E. (1981) “An Exploration in the Theory of Exchange Rate Regimes,” Journal of Political
Economy 89, 865–890.
Baxter, M. and A. Stockman (1989) “Business Cycles and the Exchange Rate Regime: Some
International Evidence,” Journal of Monetary Economics 23, 377–400.
Devereux, M. and C. Engel (1998) “Fixed versus Floating Exchange Rates: How Price Setting
Affects the Optimal Choice of Exchange-Rate Regime,” mimeo University of British Columbia.
Flood, R. and A. Rose (1995) “Fixing Exchange Rates: A Virtual Quest for Fundamentals,”
Journal of Monetary Economics 36, 3–37.
Greenwood, J. and S. Williamson (1988) “International Financial Intermediation and Aggregate
Fluctuations under Alternative Exchange Rate Regimes,” Journal of Monetary Economics 23,
401–431.
Obstfeld and Rogoff (1996) Chapter 8.
Obstfeld and Rogoff (1995) “The Mirage of Fixed Exchange Rates,” Journal of Economic Perspectives 9, 73–96.
Stockman, A. (1983) “Real Exchange Rates under Alternative Nominal Exchange Rate Systems,”
Journal of International Money and Finance 2, 147–166.
Svensson, L. (1992) “An Interpretation of Recent Research on Exchange Rate Target Zone,” Journal of Economic Perspectives 6, 119–144.
III. OTHER TOPICS
A. Collapsing Regimes, Speculative Attacks, and Target Zones
Agenor, P.-R. and R. Flood (1994) “Macroeconomic Policy, Speculative Attacks, and Balance of
Payment Crises,” in F. van der Ploeg (ed.) The Handbook of International Macroeconomics,
Oxford: Basil Blackwell Ltd, 506–534.
Burnside, C., M. Eichenbaum, and S.T. Rebelo (1999), “On the Fundamentals of Self-Fulfilling
Speculative Attacks,” NBER Working Paper No. W7554.
8
Cole, H.L. and T.J. Kehoe (1995) “Self-Fulfilling Debt Crisis,” Review of Economic Studies 67,
91–116.
Chari, V.V. and P.J. Kehoe (2000) “Financial Crisis as Herds,” Federal Reserve Bank of Minneapolis Working Paper No. 600.
Corsetti, G., P. Pesenti, and N. Roubini (1998) “Paper Tigers? A Model of the Asian Crisis,”
mimeo Yale University.
Flood, R. and P. Garber (1984) “Collapsing Exchange Rate Regimes: Some Linear Examples,”
Journal of International Economics 17, 1–13.
Kaminsky, G. and C. Reinhart (1999) “The Twin Crises: The Causes of Banking and Balance-ofPayments Problems,” American Economic Review 89, 473–500.
B. International Debt
Bulow, J. and K. Rogoff (1989) “A Constant Recontracting Model of Sovereign Debt,” Journal of
Political Economy 97, 155–178.
Bulow, J. and K. Rogoff (1989) “Sovereign Debt: Is to Forgive to Forget?,” American Economic
Review 79, 43–50.
Kletzer, K. (1994) “Sovereign Immunity and International Lending,” in F. van der Ploeg (ed.) The
Handbook of International Macroeconomics, Oxford: Basil Blackwell Ltd, 506–534.
Obstfeld and Rogoff (1996) Chapter 6.
C. International Asset Pricing
Adler, M. and B. Dumas (1983) “International Portfolio Choices and Corporation Finance: A
Synthesis,” Journal of Finance 38, 925–984.
Harvey, C. (1991) “The World Price of Covariance Risk,” Journal of Finance 56, 111–157.
Dumas, B. (1994) “Partial Equilibrium versus General Equilibrium Models of the International
Capital Market,” in F. van der Ploeg (ed.) The Handbook of International Macroeconomics,
Oxford: Basil Blackwell Ltd, 506–534.
Devries, C. (1994) “Stylized Facts of Nominal Exchange Rate Returns,” in F. van der Ploeg (ed.)
The Handbook of International Macroeconomics, Oxford: Basil Blackwell Ltd, 506–534.
French, K. and J. Poterba (1991) “Investor Diversification and International Equity Markets,”
American Economic Review 81, 221–226.
Lewis, K. (1995) “Puzzles in International Financial Markets,” in G. Grossman and K. Rogoff
(eds.) Handbook of International Economics, vol. 3, Amsterdam: North-Holland.
D. International Growth
Barro, R. (1991) “Economic Growth in a Cross-Section of Countries,” Quarterly Journal of Economics 106, 101-121.
Devereux, M. and G. Smith (1994) “International Risk Sharing and Economic Growth,” International Economic Review 35, 535–550.
Lucas, R. (1990) “Why Doesn’t Capital Flow from Rich Countries to Poor Countries,” American
Economic Review 80, 92–96.
9
Grossman, G. and E. Helpman (1991) Chapter 9.
Grossman, G. and E. Helpman (1990) “Trade, Innovation and Growth,” American Economic Review 80, 86–91.
Obstfeld, M. (1994) “Risk-Taking, Global Diversification, and Growth,” American Economic Review 85, 1310–1329.
Obstfeld and Rogoff (1996) Chapter 7.
E. International Policy Coordination
Kehoe, P. (1987) “Coordination of Fiscal Policies in a World Economy,” Journal of Monetary
Economics 19, 349–376.
Kehoe, P. (1989) “International Policy Coordination May Be Undesirable,” Review of Economic
Studies 56, 289–296.
Devereux, M. (1988) “International Cooperation, Precommitment, and Welfare,” International
Economic Review 31, 439–456.
Rogoff, K. (1985) “Can International Monetary Policy Coordination Be Counterproductive?,” Journal of International Economics 18, 199–217.
10
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