Seminar in International Finance



Seminar in International Finance

Eco 383, Fall 2006

 

|Time: Tue, Thu 10:55am-12:40pm |Tomas Dvorak |

|Room: SSCI 014 |Office: SSCI 215 |

|Office Hours: Mon, Tue, Wed, Thurs 2 - 3pm or by appt. |Phone: 388 8016 |

|union.edu/PUBLIC/ECODEPT/dvorak |Email: dvorakt@union.edu |

Course description: This course is about the financial markets that facilitate trade and investment in today’s global economy. The course is divided into three parts. First, we will learn how to keep track of international transactions and how these transactions are analyzed, i.e. balance of payments. Second, we will try to understand what determines exchange rates - namely purchasing power and interest rate parity conditions. Finally, we will examine different exchange rate regimes, including the free float in the U.S., the fixed exchange rate in China and the common currency in Europe.

Emphasis in the course will be placed on understanding the events currently happening around us. These include the widening U.S. current account deficit, the depreciation of the dollar against the euro, China’s reluctance to float its exchange rate, and the financial crises in Asia and Argentina.

Prerequisites: The formal prerequisite is an intermediate macro course. Informal prerequisites include a strong interest in applied international economics and enthusiasm to work with economic data.

Readings: The required text is a custom-made e-book which includes selected chapters from International Economics(13th ed.) by Thomas Pugel. You should purchase the book from (click on ‘custom ebooks’ and follow the five steps). We will also rely on a number of published and unpublished articles which will be distributed in class. In addition, you should regularly read economic press such as the Economist, BusinessWeek and the Wall Street Journal so that you are able to discuss current issues in class.

Course requirements: Active participation in class is required of all students. The final course grade will be determined according to the following table:

|Midterm (October 11) |30% |

|Final |30% |

|Problem Sets |20% |

|Research Paper |20% |

There will be 5 problem sets. These will consist of problems, data manipulation and/or short essays. You are encouraged to discuss problem sets with one another. You may turn in problem sets as a group of no more than 2 people. In this case, all members of the group will receive the same grade for that problem set. You will write your research paper in stages. A proposal outlining the question that you would like to explore is due October 10. Your first draft is due October 31, and final draft is due November 21. Additional guideless will be provided in class. No late work will be accepted without a serious medical reason.

It is the policy of Union College to make reasonable accommodations for qualified individuals with disabilities. If you are a person with a disability and wish to request accommodations to complete your course requirements, please make an appointment with me as soon as possible to discuss your request. All discussions will remain confidential.

Course Outline:

I. Introduction

1. What is this course about and why should you take it?

 

II. How do we record international transactions?

1. Why should an economy be open?

"A cruel sea of capital" The Economist, May, 2003 

2. Balance of Payments Accounting

Chapter 16

3. Balance of Payments Analysis

4. Case Study: U.S. Current Account Deficit

"Global Imbalances: The New Economy, the Dark Matter, the Savvy Investor and the Standard Analysis” by Barry Eichengreen, March 2006

"The O'Neill doctrine,"' The Economist, April 2002

”Too Much Money” Business Week, June 2005

III. What determines exchange rates?

1. Foreign exchange market

Chapter 17

2. Interest Rate Parity

Chapter 18

3. Does Interest Rate Parity Hold?

Kenneth A. Froot; Richard H. Thaler, 1990, "Anomalies: Foreign Exchange" The Journal of Economic Perspectives 4(3), 179-192.

4. Purchasing Power Parity

Chapter 19

5. Does Purchasing Power Parity Hold?

"Big MacCurrencies,'' The Economist, May 2006.

6. Case Study: Does Productivity Drive the Dollar?

"To What Extent Does Productivity Drive the Dollar?" Current Issues 7(8), Federal Reserve Bank of NewYork, August 2001.

7. Microstructure

Chapter 1 in The Microstructure Approach to Exchange Rates by Richard Lyons

IV. How do central banks ‘fix’ exchange rates?

1. Fixed Exchange Rates

Chapter 20

Maurice Obstfeld, and Kenneth Rogoff, 1995, "The Mirage of Fixed Exchange Rates,'' Journal of Economic Perspectives 9(4), 73-96.

”Precisely Wrong” The Economist June 2005

2. Floating Exchange Rates

Chapter 20

3. Optimum Currency Areas

Chapter 25

"Germany's Euro Test," The Economist, June 2003.

4. Choice of Exchange Rate Regime

Stanley Fischer, 2001, "`Exchange Rate Regimes: Is the Bipolar View Correct?,'' Journal of Economic Perspectives 15(2), 3-24.

5. Case Study: China: To Float or Not To Float?

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