International
Macroeconomics and Finance
Economics 510
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Spring, 2000
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Alan C. Stockman
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University of Rochester
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Tues-Thur 2-3:15
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Links
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PRELIMINARY—January 12, 2000
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A Few Questions:
Some Empirical Observations in Search of
a Good Theory:
1.
Exchange rates do not appear to be closely related to any
underlying fundamentals.
2.
Exchange rates appear to show high persistence with little
short-run dynamics.
3.
Exchange-rate systems appear to affect the behavior of real
exchange rates.
4.
Real and nominal exchange rates move together very closely.
5.
Forward exchange rates are poor and biased predictors
of future spot exchange rates; on average the forward premium predicts the
wrong direction for the change in the spot rate.
6.
Devaluations appear to have real effects.
7.
People choose very little international diversification of
investment portfolios.
8.
Consumption is not highly correlated across countries
despite apparent gains from risk-sharing.
9.
National borders appear to play a major role in deviations
from the law of one price.
10.
Currency crises are associated with devaluations and with a
variety of apparent real effects.
11. Currency crises tend to occur in bunches, suggesting contagion.
Some other questions:
1.
What causes currency crashes? What underlying conditions make
them more likely?
2.
What are the effects of currency crashes?
3.
What conditions lead to speculative attacks on fixed exchange
rates? Do these attacks have real effects?
4.
What causes exchange rates to change?
5.
Why are exchange rates so highly variable?
6.
What are the effects of changes in exchange rates (or
of the exogenous changes that caused them)?
7.
What causes the balance of trade to change?
8.
What are the allocative and distributional effects of
alternative exchange-rate systems?
9.
Under what conditions can we rank (or even compare)
exchange-rate systems in terms of welfare?
10.
Why do governments often have strong preferences about the
exchange-rate system? What affects a country’s actual choice of an
exchange-rate system?
11.
Are business cycles transmitted from one country to another?
(If so, how?) Or are there common shocks across countries?
12.
What effects do one country’s macroeconomic policies have on
other countries? What affects the equilibrium of the strategic-interaction game
played by policymakers?
13.
How do international financial markets alter the effects of
monetary and fiscal policies?
14. What are the effects of the policies of international organizations such as the IMF and World Bank? Do their policies create excessive moral hazard? What would be better?
General Topics:
1. Exchange-rate determination
2. Exchange-rate systems
3. Financial crises and policy responses -- speculative
attacks, currency crises, devaluations, stabilization policy, effects of
institutional arrangements, etc.
4. International financial markets -- including
diversification; asset-pricing and risk-premia puzzles; capital flows, international
debt, etc.
5. International issues of business cycles and government
policies
Background and Reference:
Maurice Obstfeld and Kenneth Rogoff, Foundations of International
Macroeconomics, MIT Press: Cambridge MA, 1996
Handbook of International Economics, Volume 3, Gene M. Grossman and Kenneth Rogoff, editors, Elsevier Science: New York, 1995.
Carlos
Vegh’s UCLA Reading List
Sergio
Rebelo’s Northwestern Reading List
Rudi Dornbusch’s MIT Reading List and a few lecture notes
Linda Tesar’s Michigan Reading List (1999)
Topic 1: Exchange-rate determination
Reading Assignment 1:
* Alan C. Stockman, “The Equilibrium Approach to Exchange
Rates,” Economic Review, Federal Reserve Bank of Richmond, March-April,
1987, 12-31. Undergraduate-level presentation of basic model
* Robert Lucas, “Interest Rates and Currency Prices in a Two-Country World,” Journal of Monetary Economics 10 (1982), 335-60.
basic 2-country,
2-good model with representative agents, cash-in-advance, complete markets
* Alan Stockman and Harris Dellas, “International Portfolio
Nondiversification and Exchange Rate Variability,” Journal of International
Economics 26, no. ¾, May 1989, 271-90. 1989.
non-traded goods in Lucas’s 1982 model: affects consumption correlations and
portfolios
Reading Assignment 2:
Milton Friedman, “The Case for Flexible Exchange Rates,” in Essays in Positive Economics, University of Chicago Press, 1951.
This classic paper on exchange rates is insightful and packed with sophisticated economics, though it is sometimes confused.
Alan C. Stockman, “A Theory of Exchange Rate Determination,” Journal of Political Economy 88 (1980), 673-98.
early equilibrium
model of exchange rates: attempts to show how real shocks can cause changes in
nominal exchange rates that are correlated with changes in real exchange rates
* Lars E.O. Svensson, “Currency Prices, Terms of Trade, and
Interest Rates: A General Equilibrium Asset-Pricing, Cash-in-Advance Approach,”
Journal of International Economics, 1985.
generalizes the cash-in-advance model in Lucas, 1982
Maurice Obstfeld and Alan Stockman, “Exchange-Rate
Dynamics,” R. Jones and P. Kenen (eds.), Handbook of International Economics,
Vol II, Amsterdam: North-Holland, 1985
survey of models of exchange rates up to 1984
* Backus, David K., Patrick J. Kehoe, and Finn E. Kydland,
“International
Real Business Cycles,” Journal of Political Economy, 1992.
a two-country, one-sector model with roots in Kydland and Prescott
Reading Assignment 3:
Rudiger Dornbusch, “Expectations and Exchange Rate Dynamics,” Journal of Political Economy 84 (1976), 1161-76
famous paper on
exchange-rate “overshooting” with a sticky price level in the short run
Maurice Obstfeld and
Kenneth Rogoff, Foundations of International Macroeconomics, ch. 9
a 2-country Kiyotaki-Wright (QJE) model; modified version of below
Maurice Obstfeld and Kenneth Rogoff, “Exchange Rate Dynamics
Redux, Journal of Political Economy 103, June 1995, 624-60.
a 2-country Kiyotaki-Wright (QJE) model; modified version of above
V. V. Chari, Patrick J. Kehoe, and Ellen R. McGrattan, Can Sticky Price
Models Generate Volatile and Persistent Real Exchange Rates?, Staff
Report 223 (Revised December 1998)
V. V. Chari, Patrick J. Kehoe, and Ellen R. McGrattan , Sticky Price
Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence
Problem?, Staff Report 217 (Revised May 1998), Forthcoming In: Econometrica
Catherine Betts and Michael B. Devereux, “The Exchange Rate in a Model of Pricing to Market,” European Economic Review 40, 1996, 1007-1021
extends
Obstfeld-Rogoff model to include pricing to market; along with sticky
local-currency prices, this jointly magnifies the response of exchange rates to
monetary shocks and exchange-rate variability
Catherine Betts and Michael B. Devereux, “The Real Exchange Rate and Aggregate Fluctuations under Pricing to Market,” UBC working paper, 1995
generalization of EER
paper
Reading Assignment 3:
Jeffrey A. Frankel and Andrew K. Rose, “Empirical Research on Nominal Exchange Rates,” Gene Grossman and Kenneth Rogoff (eds.), Handbook of International Economics Volume 3, 1995.
Mark Taylor, “Exchange Rate Behavior”, Journal of Economic Literature, March, 1995.
Charles Engel, “Accounting for U.S. Real Exchange Rate Changes,” NBER WP 5394, 1995
Charles Engel and John H. Rogers, “Violating the Law of One Price: Should We Make a Federal Case Out of It?” NBER Working Paper No. W7242, July 1999
John Rogers and Michael Jenkins, “Haircuts or Hysteresis? Sources of Movements in Real exchange rates,” Journal of International Economics XXXVIII, 1995, 339-60
Robert Flood and Andrew Rose, “Fixing Exchange Rates: A Virtual Quest for Fundamentals,” Journal of Monetary Economics 36 no. 1, August 1995, 3-38.
Rogoff, Kenneth, “The Purchasing Power Parity Puzzle,” Journal of Economic Literature 34 (June 1996), 647-668.
Ken Froot, M. Kim and K. Rogoff (1995) “The Law of One Price over 700 Years”, NBER W.P. No. 5132, May 1995.
Ken Froot and Kenneth Rogoff, “Perspectives on PPP and Long-Run Real Exchange Rates,” Handbook of International Economics vol. 3, Gene Grossman and Kenneth Rogoff (eds.), (Amsterdam: Elsevier Science Publishers B.V., 1995): 1647-88.
Charles Engel, “Is Real Exchange Rate Variability Caused by Relative Price Changes? An Empirical Investigation,” Journal of Monetary Economics 32, August 1993, 35-50.
relative prices of the
same good in different countries vary much more than relative prices of different
goods in the same country; moreover, these former changes are closely connected
with changes in nominal exchange rates; evidence for sticky-price models?
John Campbell and Richard Clarida, “The Dollar and Real Interest Rates,” Carnegie-Rochester Conference Series 27, 1987.
most variation in
exchange rates does not seem to be expected and built into international
real-interest differentials (e.g. as dynamic responses to previous shocks);
instead, most seem to be unexpected and permanent
Shang-Jin Wei and David C. Parsley, “Purchasing Power
Dis-Parity During the Floating exchange rate period,” NBER working paper 5032,
April 1995.
ytr; find half-life of convergence to PPP for tradeable goods is 4 years
David C. Parsley and Shang-Jin Wei, “Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations,” Quarterly Journal of Economics 111, November 1996: 1211-1236.
Convergence to PPP
across cities in the U.S., with disaggregated panel data, occurs with a
half-life of 4 to 5 quarters for traded goods and 15 quarters for services;
convergence is faster when initial price differences are large and cities are
geographically close; but transport costs associated with distance explain only
a small fraction of the difference between intra-national and international
convergence rates (of 3 to 7 years); authors reject unit root without
city-specific means, but cannot reject in their presence
Francis X. Diebold, Steven Husted, and Mark Rush, “Real
Exchange Rates under the Gold Standard,” Journal of Political Economy 99
No. 6, December 1991, 1252-71.
they were stationary: PPP holds in the long run
Nelson Mark, “Exchange-Rates and Fundamentals: Evidence on the Long-Run Predictability and Overshooting,” American Economic Review 85, March 1995, 201-18.
exchange rates are
predictable—they slowly return toward the simple monetary-model solution
James R. Lothian and Mark P. Taylor, “Real Exchange Rate
Behavior: the Recent Float from the Perspective of the Past Two Centuries,”
Fordham University, 1992.
evidence that exchange rates are I(0) and highly predictable
Pinelopi K. Goldberg and Michael M. Knetter, “Goods Prices and Exchange Rates: What Have We Learned?” NBER Working Paper 5862 (December 1996), Journal of Economic Literature.
Charles Engel and John H. Rogers, “Regional Patterns In The Law Of One Price: The Roles Of Geography Vs. Currencies,” Board of Governors of the Federal Reserve System, International Finance Discussion Papers, Number 533, January 1996
Charles Engel and John Rogers, “How Wide is the Border?” American Economic Review 86 (December 1996), 1112-1125.
Charles Engel, “Long-Run PPP May Not Hold After All,” NBER working paper. 5646, July 1996
Gagnon, Joseph, “Net Foreign Assets and Equilibrium Exchange Rates: Panel Evidence,” International Finance Discussion Paper 574, Board of Governors of the Federal Reserve System (December 1996).
Menzie Chinn and Louis Johnston, “Real Exchange Rate Levels, Productivity, And Demand Shocks: Evidence From A Panel Of 14 Countries,”IMF Working Paper, May, 1997.
Martin Eichenbaum and Charles Evans, “Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates,” Quarterly Journal of Economics 110, November 1995, 975-1009.
money shocks cause
instant real and nominal depreciations and persistent international
interest-rate differencials
Richard Clarida and Jordi Gali, “Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?”, Carnegie-Rochester Conference Series 41, December 1994, 1-56.
argues that their
structural VA shows monetary shocks to be quite important
Marianne Baxter, “Real Exchange Rates and Real Interest
Differentials: Have we Missed the Business-Cycle Relationship?” Journal of
Monetary Economics 33 no. 1, February 1994, 5-38
presents some evidence that we have
Kouparitsas, M. “Relative Prices and the Terms of Trade: An Empirical Investigation,” unpublished, Research Department, Federal Reserve Bank of Chicago.
David Backus and Mario Crucini, “Oil Prices and the Terms of Trade,” unpublished, Ohio State and NYU, 1996.
Paul O’Connell, “Market Frictions and Relative Traded Goods Prices,” unpublished, Harvard University, 1997
Paul O’Connell and S.J. Wei, “The Bigger They Are, the Harder They Fall: How Price Differences between U.S. Cities are Arbitraged,” Harvard University, 1997.
Mark P. Taylor and David A. Peel, “Nonlinearities in Real Exchange Rate Adjustment during the Recent Float: Empirical Evidence and Monte Carlo Analysis, working paper, University College, Oxford, 1997
Panos, Michael, A. Robert Nobay and David A. Peel, “Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation, “ Journal of Political Economy 105 (August 1997), 862-879.
Obstfeld, Maurice, and Alan Taylor, 1997, “Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher’s Commodity Points Revisited,” unpublished, 1997.
Reading Assignment 4:
Raman Uppal, P. Sercu and C. Van Hulle, “The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity,” Journal of Finance, Vol. 50.4, September 1995, 1309-1319.
Raman Uppal and P. Sercu, “Exchange Rate Volatility and Trade: A General Equilibrium Analysis,” (UBC Working Paper, 1996.
Bernard Dumas, “Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World,” Review of Financial Studies, vol. 5, 1992, pp. 153-180
Lee E. Ohanian and
Alan C. Stockman, “ Arbitrage Costs and Exchange Rates,” University of
Rochester, unpublished, 1997.Raman Uppal, “A General Equilibrium Model of
International Portfolio Choice,” Journal of Finance, Vol. 48.2, June 1993,
529-553.
Reading Assignment 5:
Charles N. Noussair, Charles E. Plott, and Raymond G. Riezman, “The principles of exchange-rate determination in an international finance experiment,” journal of political economy, August 1997, Vol. 105 No. 4, 822 --861.
Charles Engel, “A Model of Foreign Exchange Rate Indetermination,” NBER working paper 5766, September 1996
Paul Beaudry and
Michael Devereux, “Monetary Policy and the Real Exchange Rate in a Price
Setting Model of Monopolistic Competition,” Carnegie-Rochester Conference
Series, 1995.
2-country version of Benhabib-Farmer
multiple-equilibrium model
Topic 2: Exchange-rate systems
Reading Assignment 6:
Flood, R. and A. Rose, “Fixing Exchange Rates: A Virtual Quest for Fundamentals,” Journal of Monetary Economics 36 no. 1, August 1995, 3-38.
Alan Stockman, “Real Exchange Rates under Alternative Nominal Exchange Rate Systems,” Journal of International Money and Finance 2 (Aug., 1983), 147-66
evidence that the
nominal exchange-rate system affects relative-price behavior
Michael Mussa, “Nominal Exchange Rate Regimes and the Behavior of Real Exchange Rates,” Carnegie-Rochester Conference Series on Public Policy 25, 1986, 117-214.
further evidence on
the result in Stockman, JIMF 1983
Ben S. Bernanke, “The macroeconomics of the Great Depression: A Comparative Approach,” Journal of Money, Credit, and Banking 27 no. 1, February 1995, 1-28.
Ehsan U. Choudri and Levis A. Kochin, “The Exchange Rate And The International Transmission Of Business Cycle Disturbances: Some Evidence From The Great Depression,” Journal of Money, Credit, and Banking 12, 1980, 565-74.
Vittorio Grilli and Graciela Kaminsky, “Nominal Exchange Rate Regimes and the Real Exchange Rate: Evidence from the US and Britain, 1885-1986,” NBER wp 3067, August 1989; revised version: Univ. Pennsylvania wp, #19, October 1988.
Alan C. Stockman, “Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory,” in K. Brunner and A.H. Meltzer (eds.), Carnegie-Rochester Conference Series on Public Policy 29, Autumn 1988, 259-94.
attempts to explain
the difference in relative-price behavior across exchange-rate systems in an
equilibrium model (without assuming sticky prices)
Alan Stockman and Lee E. Ohanian, “The Short-Run Independence of Monetary Policy under Pegged Exchange Rates and Effects of Money on Exchange Rates and Interest Rates, Journal of Money, Credit, and Banking, 1997.
Perfect-competition
sticky-price model gives SR monetary indepedence with pegged exchange rates
Marianne Baxter and Alan C. Stockman, “Business Cycles and the Exchange Rate Regime: Some International Evidence,” Journal of Monetary Economics 23 No. 3, May 1989, 377-400.
what else does the
exchange-rate system affect (besides relative prices)?
Tornell, Aaron and Andres Velasco (1995) “Fixed versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?”, NBER W.P. No.5108.
Andres Velasco, “When are Fixed Exchange Rates Really Fixed?”, NBER w.p. 5842, November 1996.
Canzoneri, M. and
C.A. Rogers (1992) “Is The European Community an Optimal Currency Area ?
Optimal Taxation versus the Cost of Multiple Currencies”, American Economic
Review, June, 419-433.
Topic 3: Currency crises; speculative attacks; devaluation; stabilization; etc.
Reading Assignment 7 (Target Zones, Devaluation, Speculative Attacks, and Related Issues) :
Garber, Peter B., and Lars E.O.Svensson. “The Operation and Collapse of Fixed Exchange Rate Regimes,” in Gene Grossman and Kenneth Rogoff (eds.) The Handbook of International Economics, vol. 3 (Amsterdam: Elsevier, 1995).
Obstfeld, Maurice, “The Logic of Currency Crises,” in Barry Eichengreen, Jeffry Frieden, and Jurgen von Hagen, eds., Monetary and Fiscal Policy in an Integrated Europe (New York: Springer), pp. 63-90.
Eichengreen, Barry and Andrew K. Rose, “Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises,” NBER Working Paper No. 6370 (1998).
*Eichengreen, B., Andy K. Rose, and Charles Wyplosz, “Contagious Currency Crises,” NBER
Working Paper No. 5681 (1996).
Roubini, Nouriel, “What Caused Asia’s Economic and Currency Crisis and Its Global Contagion?” Roubini’s famous Asian Crisis Page – MANY (too many?) links
Garber, Peter M., and Lars E.O. Svensson, “The Operation and Collapse of Fixed Exchange Rate Regimes,” Chapter 36 in GR.
Flood, Robert P., Peter Garber, and Charles Kramer, “Collapsing Exchange Rate Regimes: Another Linear Example,” Journal of International Economics, Vol. 41 (1996), pp. 223-234.
*Calvo, Guillermo, “Balance of Payments Crises in a Cash-in-Advance Economy, Journal of Money, Credit and Banking, Vol. 19 (1987), pp. 19-32.
*Lahiri, Amartya and Carlos A. Végh, “Delaying the Inevitable: Optimal Interest Rate Policy and BOP Crises” (mimeo, UCLA, 1999)
*Cole, Hal and Tim Kehoe, “A Self-Fulfilling Model of Mexico’s 1994-1995 Debt Crisis,” Journal of International Economics, Vol. 41 (1996), pp. 309-330.
*Krugman, Paul, “Are Currency Crises Self-Fulfilling?,” in Ben Bernanke and J. Rotembers, eds., NBER Macroeconomics Annual 1996 Cambridge, Mass.,: MIT Press, 1996), pp. 345-407.
Flood, R. and P. Garber (1984) “Collapsing Exchange Rate Regimes: Some Linear Examples”, Journal of International Economics.
Roberto Chang, Andres Velasco, “Liquidity Crises in Emerging Markets: Theory and Policy,” NBER Working Paper No. W7272, July 1999
Allan Drazen, “Political Contagion in Currency Crises,” NBER Working Paper No. W7211, July 1999
Craig Burnside, Martin Eichenbaum, Sergio Rebelo, “Hedging and Financial Fragility in Fixed Exchange Rate Regimes,” NBER Working Paper No. W7143, May 1999
Aaron Tornell, “Common Fundamentals in the Tequila and Asian Crises,” NBER Working Paper No. W7139, May 1999
Enrique G. Mendoza, Martin Uribe, “The Business Cycles of Balance-of-Payment Crises: A Revision of Mundellan Framework,” NBER Working Paper No. W7045, March 1999
Ricardo J. Caballero, Arvind Krishnamurthy, “Emerging Market Crises: An Asset Markets Perspective,” NBER Working Paper No. W6843, December 1998
Roberto Chang, Andres Velasco, “The Asian Liquidity Crisis,” NBER Working Paper No. W6796, November 1998
Craig Burnside, Martin Eichenbaum, Sergio Rebelo, “Prospective Deficits and the Asian Currency Crisis,” NBER Working Paper No. W6758, October 1998
Robert Flood, Nancy Marion, “Perspectives on the Recent Currency Crisis Literature,” NBER Working Paper No. W6380, January 1998
Dani Rodrik, Andres Velasco, “Short-Term Capital Flows,” NBER Working Paper No. W7364, September 1999
Bong-Chan Kho, Rene M. Stulz, “Banks, the IMF, and the Asian Crisis,” NBER Working Paper No. W7361, September 1999
Roberto Rigobon, “On the Measurement of the International Propagation of Shocks,” NBER Working Paper No. W7354, September 1999
Kristin Forbes, Roberto Rigobon, “No Contagion, Only Interdependence: Measuring Stock Market Co-movements,” NBER WP W7267, July 1999
Obstfeld and Rogoff, 554-556 (the classical Krugman model of speculative attacks.)
Obstfeld and Rogoff, 648-653 (a multiple equilibrium interpretation of speculative attacks.)
Barry Eichengreen, Andrew K. Rose, Charles Wyplosz, “Contagious Currency Crises,” NBER Working Paper 5681, July 1996
Maurice Obstfeld, “Rational and Self-Fulfilling Balance-of-Payments Crises,” American Economic Review 76, No. 1 March 1986, 72-81.
speculative attacks on
currencies under pegged exchange rates
Hal Cole and Tim Kehoe, “Self Fulfilling Debt Crises,” FRB Minneapolis, December 1996.
under what conditions
can creditors’ refusal to roll over debt, due to worry about default, be
self-fulfilling?
Hal Cole and Tim Kehoe, “A Self-Fulfilling Model of Mexico’s 1994 -95 Debt Crisis,” April 1996 Federal Reserve Bank of Minneapolis staff report 210
Lahiri A. and C. Vegh, Krugman Balance of Payments Crises: are they for real?, UCLA Working Paper, 1997
Corsetti G. and P. Pesenti, “Welfare and Macroeconomic Interdependence”, NBER WP, December 1997
Bordo, Michael D., and Anna J. Schwartz, “Why Clashes between Internal and External Stability Goals End in Currency Crises,” Open Economies Review, Vol. 7 (1996), pp. 437-468.
Draws lessons on
currency crises based on a review of historical and modern currency crises.
Cavallari, L. and G. Corsetti (1996) “Arbitrage Mechanisms Leading to Currency Crises”, University of Rome, August 1997
Giancarlo Corsetti and Nouriel Roubini, “What Caused the Asian Currency and Financial Crisis?”, Yale University, January 1998.
Guillermo A. Calvo, “Balance of Payments Crises in a Cash-in-Advance Economy,” Journal of Money, Credit, and Banking 19, February 1987.
more on speculative
attacks on currencies under pegged exchange rates
Calvo G. Variety of Capital-Market Crises, University of
Maryland WP n. 15, 1995
Calvo, Guilermo, and Enrique Mendoza, “Reflections on Mexico’s Balance of Payments Crisis: A Chronicle of a Death Foretold,” mimeo, University of Maryland, May 1996
Chari, V.V. and Patrick Kehoe, “Hot Money,” mimeo, Federal Reserve Bank of Minneapolis, December 1996
Andrew Atkeson and Jose-Victor Rios Rull, “The Balance of Payments and Borrowing Constraints: An Alternative View of Mexico’s Recent Crisis,” Journal of International Economics, 1997.
Blanco, H., and P. Garber, “Recurrent Devaluation and Speculative Attacks on the Mexican Peso,” Journal of Political Economy, 1986.
Calvo G. and Mendoza, E., “Petty Crime, Cruel Punishment,” AER May 1996.
Dornbusch, R. I. Goldfjan, and R. Valdes, “Currency Crises and Collapses,” Brookings Papers on Economic Activity, 1995.
Frankel, J. and A. Rose, “Currency Crashes in Emerging Markets: An Empirical Treatment,” Journal of International Economics, 1996.
Jeremy Bulow and Paul Klemperer, “Rational Frenzies and Crashes,” Journal of Political Economy 102 no. 1, February 1994, 1-23.
Kenneth A. Froot and Maurice Obstfeld, “Exchange Rate Dynamics under Stochastic Regime Shifts: A Unified Approach,” Journal of International Economics 31 No. ¾, November 1991, 203-30.
nice method for
solving models with regime shifts; applications include speculative attacks
Kenneth A. Froot and Maurice Obstfeld, “Stochastic Process Switching: Some Simple Solutions,” Econometrica, 59 (January 1991), 241-250.
Lars E.O. Svensson, “Why Exchange-Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates,” NBER Working Paper #4207, November, 1992.
Robert Flood and Peter Garber, “The Linkage between Speculative Attack and Target Zone Models of Exchange Rates,” Quarterly Journal of Economics CVI No. 4, November 1991, 1367-72.
Reading Assignment 8 (Stabilization Policies) :
Torsten Persson and Guido Tabellini, “Double-Edged incentives: Institutions and Policy Coordination,” in in Handbook of International Economics vol. 3, Gene Grossman and Kenneth Rogoff (eds.), (Amsterdam: Elsevier Science Publishers B.V., 1995)
Sergio Rebelo, “Inflation in Fixed Exchange Rate Economies: the Recent Portuguese Experience,” IIES Seminar paper No. 517, July, 1992.
how disinflation can
affect the relative price of nontraded goods in a pegged-exchange-rate economy
Rebelo, S. and C. Végh, “Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories,” NBER Macro Annual, 1995
Vegh, C. (1992) “Stopping High Inflation: An Analytical Overview”, IMF Staff Papers, Vol. 39, September.
Guidotti, P. and C. Vegh (1992) “Losing Credibility: The Stabilization Blues”, IMF Working Paper, September.
Calvo, G. and C. Vegh (1993) “Fighting Inflation with High Interest Rates: The Small Open Economy Case under Flexible Prices”, Journal of Money Credit and Banking.
Guillermo A. Calvo and Carlos A. Vegh, “Inflation stabilization and BOP crises in developing countries,” December 1997.
Mendoza, E. and Uribe, M. “The Syndrome of Exchange Rate Based Stabilizations and the Uncertain Duration of Currency Pegs,” IFDP No. 548, Federal Reserve Board, 1996
Rebelo, S. “What Happens when Countries Peg Their Exchange Rates: The Real Side of Economic Reforms,” unpublished, University of Rochester, September 1996
Uribe, M., “Comparing the Welfare Costs and the Initial Dynamics of Alternative Temporary Stabilization Policies,” IFDP No. 539, Federal Reserve Board, 1996.
Albuquerque, R. and S. Rebelo, “Dynamics of Economic Reform,” mimeo, University of Rochester
Calvo, G., “Costly Trade Liberalizations” IMF Staff Papers, 1988
Calvo, G. and Mendoza, E. “Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation,” IMF Staff Papers, 1994
Roldos, J. “Supply-Side Effects of Disinflation Programs,” IMF Staff Paper, 1995
Milesi-Ferretti, G.M. and A. Razin, “Sustainability of Persistent Current Account Deficits,” NBER WP 5467, 1996
Uribe, M., “Exchange-Rate-Based Inflation Stabilization: the
Initial Real Effects of Credible Plans,” IFDP No. 503, Board of Governors of
the Federal Reserve, 1995.
Reading Assignment 9 (Fiscal Policies) :
Enrique Mendoza and Linda Tesar, “Supply Side Economics in a
Global Economy” NBER W.P. 5086, April, 1995
Mendoza, E. and L.L. Tesar, “International Ramifications of Reforming the Tax System,” unpublished, Board of Governors of the Federal Reserve System, 1996.
Marianne Baxter, “Financial Market Linkages and the International Transmission of Fiscal Policy,” University of Rochester, 1992.
dynamic effects of
fiscal policies in an open economy along the lines of Frenkel and Razin; with
complete and incomplete international financial markets
Topic 4: International financial markets
Reading Assignment 10:
Obstfeld, M. and K. Rogoff, “”The Intertemporal Approach to the Current Account,”in Handbook of International Economics vol. 3, Gene Grossman and Kenneth Rogoff (eds.), (Amsterdam: Elsevier Science Publishers B.V., 1995): 1731-99. sections 1 - 3.1.
Alan C. Stockman,
“On the Roles of International Financial Markets and Their Relevance for
Economic Policy,” Journal of Money, Credit, and Banking 20, vol 3,
August, 1988, 531-49.
a selective summary of results on
equilibrium models of open-economy macro
Linda Tesar, “Savings, Investment, and International Capital
Flows,” Journal of International Economics 31 No. ½, August 1991, 55-78.
the evidence on the “Feldstein-Horioka puzzle” (which is still a
puzzle of sorts, by the way)
Lewis, Karen, “Puzzles in International Financial Markets,” in Gene Grossman and Kenneth Rogoff (eds.), Handbook of International Economics vol. 3, (Amsterdam: Elsevier Science Publishers B.V., 1995).
Lewis, Karen., “What Can Explain the Apparent Lack of International Consumption Risk-sharing?” Journal of Political Economy 104, April, 1996, 267-97.
Tesar, L., “Evaluating the Gains from International Risksharing,” Carnegie-Rochester Conference Series on Public Policy 42, June 1995, 95-142
Bernard Dumas, “Partial-Equilibrium vs. General-Equilibrium Models of Capital Market Equilibrium,” in Van Der Ploeg, F. (ed.) The Handbook of International Macroeconomics, Cambridge Ma: Basil Blackwell, 1994.
Lars E. O. Svensson, “Trade in Risky Assets,” American Economic Review 78 No. 3, June 1988, 375-94
proof of gains from
trade in risky assets that (almost) mimics standard trade theory
Alan C. Stockman and Harris Dellas, “Tariffs, Asset Markets, and Political Risk,”, Journal of International Economics 21, November 1986, 199-214.
the ability to trade
on international financial markets drastically changes the effects of tariffs;
standard textbook comparative statics exercises give the wrong answer!
Michael B. Devereux and Khang Min Lee, “Endogenous Trade Policy and the Gains from International Financial Market,” working paper, UBC, January 1997
Gene M. Grossman and Assaf Razin, “The Pattern of Trade in a Ricardian Model with Country-Specific Uncertainty,” International Economic Review 26, No. 1, February 1985.
how international
financial markets (or their absence) can affect output and trade
Harold L. Cole and Maurice Obstfeld, “Commodity Trade and International Risk Sharing: How Much do Financial Markets Matter?” Journal of Monetary Economics, August 1991, 3-24.
gains from trade in
int. financial markets are small in some models if utility is “close” to
Cobb-Douglas; some key results in this paper were obtained earlier by Harris
Dellas
Baxter, M., U. Jermann and R. King (1997) “Nontraded goods, nontraded factors, and international non-diversification,” forthcoming, Journal of International Economics.
Froot, K. and R.H. Thaler , “Anomalies: Foreign Exchange”, Journal of Economic Perspectives, Summer, 1990
Robert J. Hodrick, The
Empirical Evidence on the Efficiency of Forward and Futures Foreign Exchange
Markets, 1987.
comprehensive book with evidence on
forward exchange rates
Reading Assignment 11 (International Debt):
Eaton, John and Raquel Fernandez (1995) “Sovereign Debt”, Gene Grossman and Ken Rogoff (eds.), Handbook of International Economics, Vol.III, Amsterdam: North Holland, 1995.
Jeremy Bulow and Kenneth Rogoff, “A Constant Recontracting Model of Sovereign Debt,” Journal of Political Economy 97, 1989, 155-78.
Jeremy Bulow and Kenneth Rogoff, “Sovereign Debt: Is to Forgive to Forget?” American Economic Review 79, 1989, 43-50.
Jeremy Bulow and Kenneth Rogoff, “The Buyback Boondoggle,” Brookings Papers on Economic Activity: no. 2, 1988, 675-698.
Harold L. Cole, James Dow, and William B. English, “Resumption of Lending in a Reputational Model of Sovereign Debt,” University of Pennsylvania, 1989
Harold L. Cole and Patrick J. Kehoe, “Reputation Spillover across Relationships: Reviving Reputation Models of Debt,” Journal of Monetary Economics 1996
English, William, “Understanding the Costs of Sovereign Default: American State debts in the 1840’s” American Economic Review 86 (March 1996): 259-275.
Eaton, Jonathan and Raquel Fernandez, “Sovereign Debt” in Handbook of International Economics, vol. 3
Andrew G. Atkeson, “International Lending with Moral Hazard and Risk of Repudiation”, Econometrica, vol. 59, number 4 (July) 1991, 1069-1089.
Harold L. Cole and Patrick J. Kehoe, Models of
Sovereign Debt: Partial vs. General Reputations, Working Paper 580
(March 1997)
Topic 5: International issues of business cycles and government policy
Reading Assignment 12:
Backus, D. P. Kehoe and F. Kydland, “Relative Price Movements in Dynamic General Equilibrium Models of International Trade”, Chapter 3 in Van Der Ploeg, F. (ed.) The Handbook of International Macroeconomics, Cambridge Ma: Basil Blackwell, 1994.
can a two-country RBC
model explain relative price movements?
Alan Stockman and Linda Tesar, “Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements,” American Economic Review 85 no. 1, March, 1995, 168-85.
argues that technology
shocks are not enough to explain international data; explores taste shocks
Schlagenhauf, D. and J. Wrase, “Liquidity and Real Activity in a Simple Open Economy Model,” Journal of Monetary Economics, 1995.
Roubini, Nouriel,
and Vitorio Grilli, “Liquidity Models in Open Economies: Theory and Empirical
Evidence,” NBER Working Paper No. 5313 (1995). Effects of changes in the
money supply on interest rates and exchange rates.
Andy Atkeson and Fernando Alvarez, “Money and Exchange Rates in the Grossman-Weiss-Rotemberg Model”, Journal of Monetary Economics, 1997.
Andy Atkeson and Patrick J. Kehoe, “Exchange Rates in Segmented Markets”, unpublished, 1997.
M. Baxter,
“International trade and business cycles,” in Gene Grossman and Ken Rogoff,
eds., Handbook of International Economics vol. III, ch. 35, pp.
1801-1864, Elsevier Science B.V., 1995.
David Backus, Patrick J. Kehoe, and Finn Kydland, “International business cycles: Theory vs. Evidence,” in Thomas F. Cooley (ed.) Frontiers of Business Cycle Research, Princeton University Press, 1995
Unsorted
Papers as of now –
Likely to be added to the reading list in the next version (soon)
*Végh, Carlos A., “Stopping
High Inflation: An Analytical Overview,” IMF Staff Papers, Vol. 39
(1992), pp. 626-695.
Easterly, William, “When is Stabilization Expansionary?,” Economic Policy (1996), pp. 67-107.
*Calvo, Guillermo A., and Carlos A.Végh, “Inflation Stabilization and BOP Crises in Developing Countries,” in John Taylor and Michael Woodford, Handbook of Macroeconomics (Amsterdam: North Holland), NBER Working Paper No. 6925, 1999.
*Calvo, G.A., “Temporary Stabilization: Predetermined Exchange Rates,” Journal of Political Economy, Vol. 94 (1986), pp. 1319-1329..
*Calvo, Guillermo A. and Carlos A. Végh, “Exchange Rate-Based Stabilisation under Imperfect Credibility” in Open-Economy Macroeconomics, by Helmut Frisch and Andreas Worgotter (London:MacMillan Press, 1993), pp. 3-28. Reprinted as Chapter 18 in CA volume.
*Rebelo, S., and C.A. Végh, “Real Effects of Exchange Rate-Based Stabilization: An Analysis of Competing Theories,” NBER Macroeconomics Annual 1995, pp. 125-174.
Uribe, Martín, “Exchange-rate-based inflation stabilization: The initial real effects of credible plans,” Journal of Monetary Economics, Vol. 39 (1997), pp. 197-221.
*Calvo, G.A., and C.A. Végh, “Credibility and the Dynamics of Stabilization Policy: A Basic Framework,” in C. Sims, ed., Advances in Econometrics: Sixth World Congress, Vol. II (Cambridge: Cambridge University Press, 1994), pp. 377-420.
*Calvo, G. A., “On the Costs of Temporary Policy,” Journal of Development Economics, Vol. 27 (1987), pp. 245-262.
Calvo, G.A., “Costly Liberalizations,” International Monetary Fund Staff Papers, Vol. 35 (September 1988), pp. 461-473.
Engel, C., and K.M. Kletzer, “Trade Policy under Endogenous Credibility,” Journal of Development Economics, Vol. 36 (1991), pp. 213-228.
van Wijnbergen, S. “Trade Reform, Policy Uncertainty, and the Current Account: A Non-Expected-Utility Approach” American Economic Review, Vol. 82 (1992), pp. 626-633
*Calvo, G.A., and A. Drazen, “Uncertain
Duration of Reform: Dynamic Implications,” NBER Working Paper 5925 (1997).
Bennett T. McCallum, Theoretical Issues Pertaining to Monetary Unions, NBER Working Paper No. W7393, October 1999.
Michael B. Devereux, Charles Engel, and Cedric Tille, “Exchange Rate Pass-Through and the Welfare Effects of the Euro,” NBER Working Paper No. W7382, October 1999
Richard Portes and Helene Rey, “The Determinants of Cross-Border Equity Flows,” NBER Working Paper No. W7336, September 1999
Qinglai Meng and Andres Velasco, “Can Capital Mobility be Destabilizing?”NBER Working Paper No. W7263, July 1999
Sebastian Edwards and Miguel A. Savastano, “Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?” NBER Working Paper No. W7228, July 1999
Richard Clarida and Joe Prendergast, “Fiscal Stance and the Real Exchange: Some Empirical Estimates,” NBER Working Paper No. W7077, April 1999
Charles Engel, “On the Foreign-Exchange Risk Premium in Sticky-Price General Equilibrium Models,” NBER Working Paper No. W7067, April 1999
Bernard Dumas and Raman Uppal, “Global Diversification, Growth and Welfare with Imperfectly Integrated Markets for Goods,” NBER Working Paper No. W6994, March 1999
Jose M. Campa, P.H. Kevin Chang, and James F. Refalo, “An Options-Based Analysis of Emerging Market Exchange Rate Expectations: Brazil’s Real Plan, 1994-1997,” NBER Working Paper No. W6929, February 1999
Richard Clarida and Joe Prendergast, “Recent G2 Current Account Imbalances: How Important are Structural Factors?” NBER Working Paper No. W6935, February 1999
Roubini, Nouriel, and Vitorio Grilli, “Liquidity Models in Open Economies:
Theory and Empirical Evidence,” NBER Working Paper No. 5313 (1995).
V. V. Chari and Patrick J. Kehoe , On the Need for Fiscal Constraints in a Monetary Union, Working Paper 589 (August 1998)
Fernando Alvarez, Andrew Atkeson, and Patrick J. Kehoe Money and Interest
Rates With Endogenously Segmented Markets
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