International Economics: Finance

Learning Outcomes

This course covers the macroeconomic and monetary side of international economics. Students who master this material will be able to do the following.

• Describe the functions of key international financial institutions.

• Find country data on exchange rates, price indices, unemployment, GDP, and the current account.

• Use open-economy macroeconomic models to explain the determinants of exchange rates, output, employment, inflation, and the current account.

• Describe the effects of monetary and fiscal policy on an open economy, and explain how these effects depend on the exchange rate regime.

• Explain the nature and causes of currency crises.

Prerequisites

An intermediate level macroeconomics course (Econ-301, or equivalent) is prerequisite to this course. In special circumstances I may approve taking Econ-301 concurrently, but be aware that Econ-372 assumes that you have a good recollection of intermediate level macroeconomics. For some readings, you will need to understand very basic statistics and regression concepts. Therefore basic Statistics (Stat-202, or equivalent) is recommended, but it is not required.

Communication

This class will use Canvas. Look there for the syllabus, lecture supplements, and assignments. Canvas announcements are sent by email; students must monitor these announcements and Canvas Conversations (Inbox). Students should also subscribe to the Canvas Discussions. In online interactions, all students are expected to adhere to basic etiquette: be respectful, and quote appropriately.

Classroom Policies (IRW)

The following policies apply to in-person meetings only.

Masks:

Be sure to follow the AU mask guidelines. These are updated on a regular basis, in response to local conditions. Use a high-quality mask (e.g., KN95). Surgical masks are not adequate. When wearing a mask, ensure that it fits correctly. The mask must be snug over both the nose and mouth.

Connected devices:

As a courtesy to other students, do not browse the web or check your email during class. Such activities distract others and reduce your ability to contribute to discussions. In addition, there is evidence that students believe themselves capable of productive multitasking but in fact are not (May and Elder, 2018).

Cell phones:

Please silence your phone before entering the classroom. (E.g., put it on vibrate, or turn it off.) Place it out of sight in a pocket or bag (and not on your desk). If you need to make or take a call, you may quietly leave the classroom. (Please sit near the door if you anticipate such a need.)

Computers:

You may use a computer to take notes or do other course-relevant activity. However, be aware that research indicates that using a computer to take notes can hinder learning (Sana, Weston, Cepeda 2013). This appears to be due to the distraction of multitasking.

Attendance is not graded. However, I present required material in the classroom that is not in the readings.

I offer no extra credit and no makeup exams. If you miss an exam due to unavoidable contingencies, such as illness or family emergencies, please approach the Dean of Students to request an excused absence. Your grade will then be calculated from the remaining exams.

International Trade (Econ-371) and International Finance (Econ-372) constitute the advanced course sequence in international economics and may be taken in any order. These courses are intended primarily for Economics majors; non-majors should consider take Econ-370 instead. Students who have taken Econ 370 are permitted to take Econ-372, but there is some overlap in the material covered. Keep in mind that only two of these three courses in international economics (Econ 370, 371, and 372) may count towards a degree in economics.

Required Texts

This course uses a textbook: International Economics: Theory and Policy 12/e, [Krugman.Obstfeld.Melitz-2022-PrenticeHall]. This textbook is referred to as KOMIE in the readings, You may also use International Finance: Theory and Policy 12/e referred to as KOMIF in the readings.

You may optionally purchase MyLab Economics to go with this textbook. This entirely optional and is not part of this course. (Some students report that it is a helpful study aid; many do not.)

Assessment

I assess mastery of the student learning outcomes (see above) by means of graded exams, graded quizzes, and ungraded class participation.

Grading

Your final grade will be based on the total points earned on graded work. There will be three quizzes (10% each, online), two midterms (20% each, in class, 1 hour and 15 minutes) and a comprehensive final exam (30%, in class, 2 hours and 30 minutes).

Grades are guaranteed for those reaching the traditional grade cutoffs. This means that it is entirely possible for everyone to earn an A in an exceptional class. Occasionally, I may weight improvement when it is substantial and when attendance and participation have been exemplary. (Typically this produces no more than a half-grade adjustment.) Finally, when necesary, I adjust all grades upwards to ensure that the median grade is B.

Macroeconomic Accounting

Topics

Stocks vs. flows. Double-entry book-keeping. National income accounting. Balance of payments accounting. Financial programming. Current account sustainability.

Readings

• KOMIE ch.13 (or KOMIF ch.2)

• [Higgins.Klitgaard.Tille-2005-CIEF]: The Income Implications of Rising U.S. International Liabilities

• There are additional (optional) readings.

Global Financial Markets

Topics:

Spot and forward markets. Covered interest parity and the pricing of forward contracts. Foreign exchange derivatives (futures, options, swaps, carry trade). Option pricing (Black-Scholes).

*Readings:

• KOMIE 14 (or KOMIF 3)

• There are additional (optional) readings.

Interest Rates and Exchange Rates

Topics:

Short-run exchange rate determination. Uncovered Interest Parity. Expected depreciation and expected asset returns. Interest rates, expectations and exchange rates. The role of exchange rate expectations in floating exchange rate regimes.

Readings:

• KOMIE 14 (or KOMIF 3).

• There are additional (optional) readings.

Money and Interest Rates: Short Run

Topics:

Monetary authorities. Definitions of the money supply. Money multiplier. The demand for liquidity. Money market equilibrium in the short run (brief review).

Readings:

• KOMIE 15 (or KOMIF 4).

• There are additional (optional) readings.

Money and Exchange Rates: Short Run

Topics:

Money and exchange rates in simultaneous equilibrium. Policy effects on asset markets. Temporary and permanent shocks (first introduction).

Readings: - KOMIE 15 (or KOMIF 4). - There are additional (optional) readings.

Money in the Long Run

Topics:

Long-run neutrality of money. Evidence on inflation and money growth. Effects on money demand of income growth and of high inflation. Money and expectations. Exchange rate overshooting (first introduction).

Readings:

• KOMIE 15 (or KOMIF 4).

• There are additional (optional) readings.

Price Levels and Exchange Rates

Topics:

Money and prices in the long run. Prices and exchange rates in the long run. Commodity price parity. Price index construction. Absolute vs. relative purchasing power parity. Penn World Table. Nominal and real effective exchange rates. Nominal vs. real shocks to the real exchange rate. Long run PPP.

Readings:

• KOMIE 16 (or KOMIF 5)

• [Pakko.Pollard-1996-FRBSLR]: For Here or To Go? Purchasing Power Parity and the Big Mac

• [Pakko.Pollard-2003-FRBSLR]: Burgernomics: A Big Mac (TM) Guide to Purchasing Power Parity

• There are additional (optional) readings.

Money and Exchange Rates II: Long Run

Topics:

Money, prices and exchange rates in the long run. Real interest parity. Monetary approach to the exchange rate. The role of inflation expectations in floating exchange rate regimes. Cross country evidence. Evidence from hyperinflations. Fisher effect. Magnification effect. Long-run determinants of the real exchange rate.

Readings:

• KOMIE 16 (or KOMIF 5) and appendix.

Exchange Rates and Trade

Topics:

Marshall-Lerner condition. J-curve. Balassa-Samuelson effect. Houthakker-Magee critique. Exchange-rate pass through. New Keynesian thinking about the trade balance.

Readings:

• KOMIE 16 & 17 (or KOMIF 5 & 6) and appendix

• There are additional optional readings.

Monetary and Fiscal Policy in the Open Economy

Topics:

Aggregate demand in the open economy. The AA-DD model of the open economy. The effects of policy changes on goods and money markets. The effects of external shocks on goods and money markets. Temporary and permanent shocks (second approach). Exchange rate overshooting (second approach). The AA-DD model and the Mundell-Fleming model (optional).

Readings and Resources:

• KOMIE 17 (or KOMIF 6);

• There are additional (optional) readings.

Pegged Exchange Rates

Topics:

Varieties of exchange rate regime; central bank FX intervention; how to peg an exchange rate; macroeconomic stabilization with pegged rates; capital flight; sterilized intervention; reserve currencies.

Readings:

• KOMIE 18 (or KOMIF 7)

• [Ghosh.Ostry-2009-FinDev]: Choosing an Exchange Rate Regime

International Monetary Systems

Topics:

Internal and external balance. Gold standard. Bretton Woods system. Fixed exchange rates. US Dollar/Euro competition. "Elasticity approach" to BoP. "Monetary approach" to BoP.

Readings and Resources:

• KOMIE 19 (or KOMIF 8);

• [Eichengreen-2009-ForeignAffairs]: The Dollar Dilemma

• [Ghosh.Ostry.Tsangarides-2010-IMFop270]: Exchange Rate Regimes and the Stability of the International Monetary System

• There are additional (optional) readings.

Video: 2021 ESM Reform

https://www.youtube.com/watch?v=SdUER6OHNlU (There are also additional (optional) resources.)

International Policy Coordination

Topics:

Automatic stabilizers. Macroeconomic interdependence. Destabilizing speculation. Policy coordination game.

Readings:

• KOMIE 19 (or KOMIF 8) appendix.

• There are additional (optional) readings.

Financial Globalization

Topics:

Capital flows and gains from trade. Capital flight. The causes and consequences of currency crises. Banking and financial fragility. Prospects for contagion. Currency crisis and IMF stabilization.

Readings:

• KOMIE 20 (or KOMIF 9), with appendix

• optional: KOMIE 22 (KOMIF 11)

• There are additional (optional) readings.

Central Bank Digital Currency

Topics

The nature of blockchain technology. Cryptocurrencies and their applications. Digital money and payments. The double-spending problem Decentralized finance Central bank digital currency (CBDC).

Reading:

Video: Blockchain, Cryptocurrencies and Central Banks by David Andolfatto

https://www.stlouisfed.org/dialogue-with-the-fed/blockchain

The Future of Money and Its Implications for Society, Central Banks, and the International Monetary System

[Prasad-2023-FRBSLR]

The Blockchain Revolution: Decoding Digital Currencies

[Andolfatto.Martin-2022-FRBSLR]

El Salvador’s bitcoin experiment: $60 million lost, $375 million spent, little to show so far

https://www.cnbc.com/2022/10/13/el-salvadors-bitcoin-holdings-down-60percent-to-60-million-one-year-later.html

M-Pesa, a success story of digital financial inclusion

https://www.bsg.ox.ac.uk/research/publications/m-pesa-success-story-digital-financial-inclusion

MyLab Economics

Use of MyLab Economics is not required for this course: it is entirely optional and unmonitored. Some students find the quizes and study aids to be useful; others do not. Our course ID for MyLab Economics is isaac92943. Pearson provided the following instructions. (Please let me know if they prove inadequate.)

Academic Support and Access Center (ASAC) MGC 243, 202-885-3360.

All students may take advantage of the Academic Support and Access Center (ASAC) for individual academic skills, counseling, workshops, tutoring and writing assistance, as well as Supplemental Instruction. All services are free. The services include the Writing Center (first floor of Bender Library), which assists students with academic writing and assignments. The Math/Stat Lab (Myers Building, 202-885-3154) which provides mathematics and statistics tutoring. Additional content tutoring is also available in the ASAC’s Tutoring Lab.

Academic Integrity

Standards of academic conduct are set forth in the University’s Academic Integrity Code. By registering for this course, you have acknowledged your awareness of the Academic Integrity Code and your obligation to become familiar with your rights and responsibilities as defined by the code. Violations of the Academic Integrity Code will not be treated lightly, and disciplinary actions will be taken should violations occur. The standard sanction for violations is failure of the course.

Emergency Preparedness

In the event of a declared pandemic (influenza or other communicable disease), American University will implement a plan for meeting the needs of all members of the university community. Should the university be required to close for a period of time, we are committed to ensuring that all aspects of our educational programs will be delivered to our students. These may include altering and extending the duration of the traditional term schedule to complete essential instruction in the traditional format and/or use of distance instructional methods. Specific strategies will vary from class to class, depending on the format of the course and the timing of the emergency. Faculty will communicate class-specific information to students via AU e-mail and Blackboard. Students are responsible for checking their AU e-mail regularly and keeping themselves informed of emergencies. In the event of a declared pandemic or other emergency, students should refer to the AU Web site (american.edu/emergency) and the AU information line at (202) 885-1100 for general university-wide information, as well as contact their faculty and/or respective dean’s office for course and school/college-specific information.

Sharing of Course Content

Students are not permitted to make visual or audio recordings, including live streaming, of classroom lectures or any class related content, using any type of recording devices (e.g., smart phone, computer, digital recorder, etc.) unless prior permission from the instructor is obtained, and there are no objections from any of the students in the class. If permission is granted, personal use and sharing of recordings and any electronic copies of course materials (e.g., PowerPoints, formulas, lecture notes and any classroom discussions online or otherwise) is limited to the personal use of students registered in the course and for educational purposes only, even after the end of the course.

Exceptions will be made for students who present a signed Letter of Accommodation from the Academic Support and Access Center. See: How Do I Request Accommodations?

http://www.american.edu/ocl/asac/Accommodations.cfm

To supplement the classroom experience, lectures may be audio or video recorded by faculty and made available to students registered for this class. Faculty may record classroom lectures or discussions for pedagogical use, future student reference, or to meet the accommodation needs of students with a documented disability. These recordings are limited to personal use and may not be distributed (fileshare), sold, or posted on social media outlets without the written permission of faculty.

Unauthorized downloading, file sharing, distribution of any part of a recorded lecture or course materials, or using information for purposes other than the student’s own learning may be deemed a violation of American University’s Student Conduct Code and subject to disciplinary action (see Student Conduct Code VI. Prohibited Conduct).