International Macroeconomics

Course Objectives:
This course reviews selected topics in international finance and open-economy macroeconomics.

Topics include national income accounts, balance of payments adjustments, models of

exchange rate determination, and macroeconomic stabilization policies under fixed and
flexible exchange rates, empirical regularities of international prices, balance of payments
crises, currency unions and debt crises. The course will also discuss various recent policy
debates. The class would meet twice a week for a total of three hours and there would be

twenty such sessions.

Prerequisites
The only prerequisites for the course are a previous course in microeconomics and a previous
course in macroeconomics. Although there are no mathematical prerequisites, much of the
material is analytical in nature, and students should feel comfortable manipulating graphs and
simple algebraic equations.
Text Books:

International Macroeconomics by Robert C. Feenstra, Alan M. Taylor, Worth Publishers

International Economics Theory and Policy, Seventh Edition, Paul R. Krugman, Maurice
Obstfeld, Addison Wesley

Grade Evaluation:
Grading will be based on:

Midterm
Final

50%
50%

There will be 1 midterm and a final.

Course Outline:
1.

Exchange Rates: Sessions 1-3

1. The Foreign Exchange Market
2. Equilibrium in the Foreign Exchange Market
3. Money and Exchange Rates in the Short-Run
4. Money and Exchange Rates in the Long-Run: Exchange Rate Overshooting
5. Purchasing Power Parity
6. The Real Exchange Rate

Readings

Feenstra-Taylor Chapters 13-15

Class Notes

Mussa, M. (1979) Empirical Regularities in the Behavior of Exchange Rates and

Theories of the Foreign Exchange Market, Carnegie-Rochester Conference Series on
Public Policy 11, 957.

"Sizzling: The Big Mac Index." The Economist. 7 July 2007.

"Misleading Misalignments; Economics Focus. The Economist. 23 June 2007.

Taylor, Alan M. and Mark P. Taylor. 2004. The Purchasing Power Parity Debate.
Journal of Economic Perspectives. 18(4). 135-58.

Obstfeld, Maurice and Rogoff, Kenneth. The Six Major Puzzles in International
Macroeconomics: Is There a Common Cause? NBER Working Paper no. 7777. July
2000. Esp. 33-41.

2.

National Income Accounts: Sessions 4-7

1. Review of National Income Accounts
2. Balance of Payments
3. Issues related to Globalization

Readings

Krugman and Obstfeld Chapter 12

Feenstra-Taylor, Chapter 17

Class Notes

Mann, Catherine. 2002. Perspectives on the U.S. Current Account Deficit and
Sustainability. Journal of Economic Perspectives. 16(3). Summer. 131-52.

3.

THE MUNDELL-FLEMING MODEL: Sessions 8-11

1. Output and Exchange Rate Determination in the Short-Run
2. Monetary and Fiscal Policy with Flexible Exchange Rates
3. Fixed Exchange Rates
4. Monetary and Fiscal Policy with Fixed Exchange Rates
5. Capital controls

Readings

Feenstra-Taylor, Chapters 18

Backus, D. and P. Kehoe (1992) International Evidence on the Historical Properties of

Business Cycles, American Economic Review 82, 864888.

Dornbusch, R. and P. Krugman (1976) Flexible Exchange Rates in the Short Run,
Brookings Papers on Economic Activity 3, 537575.

Baxter, M. and A. Stockman (1989) Business Cycles and the Exchange Rate Regime:
Some International Evidence, Journal of Monetary Economics 23, 377400.

Kaminsky, G. and C. Reinhart (1999) The Twin Crises: The Causes of Banking and
Balance-of-Payments Problems, American Economic Review 89, 473500.

Obstfeld, M. and K. Rogoff (1995) The Mirage of Fixed Exchange Rates, Journal of
Economic Perspectives 9, 7396.

4.

INTERNATIONAL MACROECONOMIC POLICY: Session 12-15

The Gold Standard

The Bretton Woods System

The Case for and Against Floating Exchange Rates

The Theory of Optimum Currency Areas

Difference between a fix and a Currency Union

The Gains From International Capital Mobility

Readings
1. Krugman and Obstfeld, Chapters 18-22
2. Feenstra-Taylor Chapter 10
3. Feldstein, M. (1988) Distinguished Lecture on Economics in
Government: Thinking about International Economic Coordination,
Journal of Economic Perspectives 2, 313.
4. Rogoff, K. (1985) Can International Monetary Policy Coordination Be
Counterproductive? Journal of International Economics 18, 199217.
5. Feldstein, M. and C. Horioka (1980) Domestic Saving and International
Capital Flows, Economic Journal 90, 314329.
6. Froot, K. and R. Thaler (1990) Anomalies: Foreign Exchange, The
Journal of Economic Perspectives 4, 179-192.
5.

BALANCE OF PAYMENTS CRISES: Session 16-18

7. What is an exchange rate crisis
8. First-Generation Models: Inconsistent Fiscal Policy
9. Second-Generation Models: Contingent monetary polices
Readings
Feenstra-Taylor Chapter 20

6.

Class Notes
Topics for Emerging Markets: Session: 19-20

1. Debt crisis
2. Deviations from PPP
3. Coping with capital inflows ( Deviations from interest parity conditions)
4. Global Imbalances
Readings
Class notes