Open Economy Macroeconomics / International Macro



 Open Economy Macroeconomics / International Macro

(Econ 472)

 

Theo S. Eicher

Caster Professor of Economics

Department of Economics

305 Savery Hall, Box 353330

University of Washington

Seattle, WA  98195-3330

teclass@u.washington.edu

Phone: (206) 685-8082

 

Office: Savery 355

  | |

|Office Hours: |Tue/Thurs 12:30-1:20 (reserve a slot at ) |

| |Please do not hesitate to come and see me if you have a problem or if you just want to discuss |

| |issues arising in the class. I also hold "electronic office hours," meaning that emails to teclass@ |

| |will be answered by the end of the next scheduled formal office hour. |

|Class Web page: |  (username: econ472, password: econ) |

|Class Blog | |

|Class Grades |Section A: |

| |Section B: |

 

Course Description

The course presents International Monetary Economics theory and applications. The goal is to provide the student with a deep understanding of the economic frameworks necessary to analyze current policy issues. Theories presented in this course cover exchange rate determination, international arbitrage, as well as monetary and fiscal policy in an open economy. Policy issues covered include the US trade deficit, the value of the dollar relative other currencies, financial crises, currency crises, and the economic linkages between countries.

Homework:

•  The required textbook is "International Economics" by J. Mutti, T.S. Eicher, and M. Turnovsky (7th Edition, Paperback, Routledge 2009).

•  The required newspaper for the class is the Wall Street Journal. Here is a link to order the paper online at a student discount. Online ordering provides the fasted access, the most efficient ordering, and the best student discount.

•  Homework problem sets must be completed before class in order for students to participate in class discussions.

•  If Case Studies have questions (usually at the very end of the link) you are expected to have written out answers when you come to class. You may be asked to turn them in and have them graded as a HOMEWORK.

•  All homework problem sets must be typed; graphs and equations may be handwritten.

•  The final presentation must be in slide deck format (e.g., PowerPoint).

•  You are expected to read the WSJ every day; always before class. If you don't have time for the entire paper, you must read at least the foreign currency column.

-  Go to the Homepage

-  Click on "Today's Paper" (crucial) in the top menu of the WSJ homepage

-  Click on "Money and Investing" in the top menu

-  Find the “Forex”, or “Currency Market” or “Foreign Exchange” or “Current Account” column (they have different names on different days).

Miscellaneous:

•        If you have special needs, requests, requirements, please come see me immediately.

•        I believe in the Honor Code. Students are on their honor not to cheat and to report instances of cheating that they observe. In exchange, it was a violation of the honor code for professors to suspect cheating for example, by proctoring exams or refusing to give take-home exams. Under the honor system students have a twofold obligation: individually, they must not violate the code, and as a community, they are responsible to see that suspected violations are reported.

Grading:

• Late homework cannot be accepted as answers are posted immediately after class.

• If you miss an exam for valid/documented reasons (see Student Handbook), I invite you to talk to me how to make up the exam.

• Your grading is based on

- 70% Quiz/Midterms (10% per quiz, the remainder is allocated equally among midterms)

- 20% Written homework assignments (the final paper counts as one homework)

- 10% Group presentation

Preparation for Class

A) COMMON MISCONCEPTIONS

Misconception #1: The purpose of classes/assignments is to prepare student for exams.

The purpose of classes and assignments is to achieve command of the material. If you have command of the material, you will do well on the exams.

Misconception #2: It is the instructor's job to cover the material.

Covering the material is the purpose of the textbook. The textbook is to be read by the student. The role of the instructor is to help the student grasp the material, to guide students in their learning, to reinforce essential concepts, and to show how the material can be applied to solve problems.

Misconception #3: Since students read learning from the book, there's no need to go to the lectures.

The lectures, the reading, and the homework combine to produce true comprehension. Lectures orient students in learning the material and allow for practiced applications.

B) HOW DO I SUCCEED?

A great way to learn economics is to do economics. Actively talking and thinking economics is crucial to further your economic intuition. One way to do so is to actively participate in class, where we puzzle through policy applications and real world problems. It is very atypical for someone to learn economics by simply watching the instructor perform or by reading a book.

I value class participation, but this does not mean I value only correct answers! IF YOU ARE NOT PREPARED TO ANSWER A QUESTION YOU CAN SIMPLY ANSWER PASS TO DEFLECT A QUESTION WITHOUT CONSEQUENCE. However, PASSING all the time is a negative signal.

Computers are often helpful in long lecture classes. In interactive classes like Econ 472, the computer will impede your learning. Think about it this way: if you are typing in an attempt to capture what's going on, you are depriving yourself of the opportunity to actively think about the question at hand. I strongly urge you to focus on class interaction and leave the computer in your backpack.

 

C) TEACHING PHILOSOPHY

I realize that my teaching philosophy may not be altogether standard, and would like to make every effort to communicate to you beforehand what to expect. Let me quote from Erich Fromm's To Have or to Be where he provides a good example of the type of learning I favor. Fromm distinguishes between a "having" mode (acquiring stuff) and a "being" mode (experiential living):

…Students in the “having” mode of existence will listen to a lecture, hearing the words and understanding their logical structure and their meaning and, at best they can write down every word in their loose-leaf notebooks so that later on they can memorize their notes and thus pass an examination. But the content does not become part of their own individual system of thought, enriching or widening it. The student and the content of the lectures remain strangers to each other, except that each student has become the owner of a collection of statements made by someone else.

…The process of learning has an entirely different quality for students in the “being” mode.  To begin with, they do not go to a course of lectures as tabulae rasae [Latin for "blank slates"]. The have thought beforehand about the problems the lectures will be dealing with and have in mind certain questions and problems of their own.  They have been occupied with the topic and it interests them. Instead of being passive receptacles of words and ideas they listen, they hear and most important they receive and they respond in an active, productive way. They do not simply acquire knowledge that they can take home and memorize. Each student has been affected and has changed: each is different after the lecture than he or she was before it. (E. Fromm, To Have or to Be," 1978, London: Sphere Books: chapter II

 

Learning Goals:

•        Understand and be able to use the terminology of the international macro economy

•        Understand the fundamental determinants of exchange rate movements

•        Understand alternative approaches to exchange rate regimes and their implications

•        Be able to analyze the impact of fiscal, monetary and exchange rate policy in the open economy and their impact on interest, prices, employment and output.

•        Be able to understand the currency market sections in popular newspapers, their value, lingo, and representation of current events

•        Collect, use and interpret economic data to provide a country analysis of international transactions and economic conditions

•        Display economic data in a meaningful manner, consistent with economic models to interpret country performance.

•        Assess critically the economic content of newspaper and journal articles

•        Be able to express ideas to others visually, verbally, and in writing

•        Contribute to live analysis of economic puzzles using arguments rooted in economic models.

 

Important Notices:

•  If you had problems downloading readings/case studies, please send me an email asap, THANK YOU!

•  All homework assignments are links that you can reach from this web page.

•  Please note that I select case studies for their educational content, NOT according to their publication date. If a case study may strike you as “out of date” please keep in mind that these applications are meant to teach you using real world situations, not inform you about current events.

•  THE OUTLINE IS PRELIMINARY AND SUBJECT TO CHANGE. PLEASE CHECK BEFORE EVERY CLASS!

Class Outline

|Date |Topic And Key Teaching Points |Reading Assignment and Written Assignments due. |

|April 2 |Introduction |·    IE CH 1 |

| |Understanding the Syllabus and the Course |·    IS/LM REVIEW (not comprehensive) |

| | |· For every class, Read&Print the most recent FX GLOBAL CALL |

| | |column in the WSJ (the most recent one usually shows the |

| | |prior day's date). |

| | |·   You find the column in this WSJ link.If the link does not|

| | |work for you, |

| | |- go homepage ( ) |

| | |- find the SEARCH on the top right |

| | |- type "FX GLOBAL CALL" (include quotation marks) |

|April 4 |Essential Terminology |·    IE Ch 12 and 13 (up to page p390) |

| |Balance of Payments |·    Why Real (Effective) Exchange Rates? |

| |Exchange rate, Markets, Regimes |·    Nominal vs Real Effective Exchange Rates |

| | |·    The Value of the Yuan |

| | |·    Case Study 1 (Who is in charge of US Interest Rates?) |

|April 9 |Effect of Exchange Rate on the Economy |·    IE Ch 13 (p392-end) |

| |Marshal Learner Condition |·    Marshall Learner (Video) |

| |J-Curve |·    Did China’s Central Bank Take Your Job? (Radio) |

| | |·    Case Study 1 (Rupee and the J-Curve) |

| | |·    Case Study 2 (Crisis and the J-Curve) - Voluntary |

|April 11 |History of Exchange Rate Regimes |·    IE Ch 21 |

| |Gold Standard (Pros and Cons) |·    Effects of UK ending the Gold Standard: FDR follows |

| |Hume’s Species Flow Mechanism |(youtube) |

| |Bretton Woods |·    Case Study 1 (Nixon Ends Bretton Woods) |

| | |·    Case Study 2 (Gold Standard & Your Wallet) - Voluntary |

| | |·    Homework 1 (J Curve) due |

| | |·    Solution to Homework 1 |

|April 16 |The Simplest Small Open Economy Model |·    IE Ch 14 (skip section on flexible exchange rates) |

| |Assumptions/Implications |·    Case Study 1 (Japanese Piggy Bank) |

| |Empirical Evidence |·    Case Study 2 (Getting Tough Won’t Work) - Voluntary) |

| |Fiscal / Monetary Policy Implications | |

|April 18 |The Large Open Economy |·    IE Ch 14, pages 449-454 |

| |Assumptions/Implications |·    Case Study 1 (When China Sneezes) |

| |Comparison of Multipliers |·    Case Study 2 (Mercantilism) |

| |Policy Implications |·    Case Study 3: East Grows, West Consumes |

| | |·    Homework 2 due |

| | |·    Solution to HW2 |

|April 23 |I) Paradise Lost |·    IE Ch 15 pages 435-top of 443 |

| |The long term equilibrium |·    Is your IPod unpatriotic? (youtube) |

| |Expenditure Switching & Expenditure & Reducing |·    Trade Wars and Buy American(youtube) |

| |  |·    The Price of Austerity |

| |  |·    Case Study 1: )The New New Thing: Fiscal Devaluation) |

| |  |·    Case Study 2: (Consequences of cuting the wrong segment |

| |  |of "G" to reduce trade deficits) |

| |  |·    Case Study 3: (Tough Love – make sure to read Simon |

| |  |Johnson’s article!) - Voluntary |

| |  |  |

| |  |·    IE Ch 14 p. 422-426 |

| |  |·    Homework 3 due |

| |II) Flexible exchange rates |·    Solution to HW3 |

|April 25 |Who Needs Policy? The Monetary Approach to the Balance |·    IE Ch 14 pages 443-446 |

| |of Payments |·    Case Study (Basic Instincts) |

| |Non Sterilization |·    Homework 4 due |

| | |·    Solution to HW 4 |

|April 30 |Midterm I (1 hour, 50 minutes) |  |

|May 2 |International Capital Markets |·    IE Ch 16 up to p486 |

| |Overview |·    IE Ch 16 p486-end |

| |“Billion Dollar Day” (video) |·    Case Study (Technical Analysis) |

| |Assignment of presentation groups |·    Homework 5 due |

| | |·    Graphs for Article in homework 5 |

| | |·     Solution to Homework 5 |

|May 7 |Modeling International Capital Markets |·    IE Ch 17 |

| |Interest Parity & Capital Account |·    Carry Trade (also read the WSJ link) |

| |External Balance (BP = 0) |·    Case Study 1 (Mother of all Carry Trades) |

| |External Balance & IS/LM |·    Case Study 2 (Contageon) |

| | |·    Case Study 3 (Thawing Dollars) - Voluntary |

|May 9 |Mundell Fleming Model: Fixed Exchange Rates |·    IE Ch 18 |

| |Goods/ Financial Markets, External/Internal Balances |·    Why Greece Is Struck With The Euro? |

| |Fiscal/Monetary Policy |·    Case Study 1 (Greece vs California) |

| | |·    Case Study 2 (EU and Country Risk) |

| | |·    Case Study (China’s Policy Options) - Voluntary |

|May 14 |Mundell Fleming Model: Flexible Exchange Rates |·     IE Ch 19 up to p572 |

| |Goods Market, Financial Market, External & Internal |·    Case Study 1 (Das Kapital) |

| |Balance | |

| |Fiscal and Monetary Policy | |

|May 16 |I) Mundell Fleming Model: Large Open Economy |·    IE Ch 19 p572-end |

| |Currency Wars |·    Beggar Thy Neighbor |

| |  |·    Currency Wars |

| |  |·    Case Study 1: Currency Wars |

| |II) Price Adjustments in the Mundell Fleming Model |·    Case Study 2: Why Fear Currency Wars? |

| |Sticky Prices |·    Case Study 3 (The $ at 1.50 euro) - Voluntary |

| | |·   Case Study 4 (Eurozone/Sticky Prices) Voluntary |

|May 21 |Price Flexibility |·    IE Ch 20 up to p610 |

| |Purchasing Power Parity |·    Case Study 1 (Bunfight) |

| |Law of One Price |·    Case Study 2 (Mac Sizzling) |

|May 23 |Currency Crises |·    IE Ch 23 / Case Studies: In the book reading |

| |Speculative Attacks |·    Case Study (Thai Speculative Attack) |

| |Second/Third Generation Crisis Models | |

|May 30 |Midterm II (1 hour, 50 minutes) |  |

|June 4 |Mundell Fleming Model: Real World Applications |·    Sample Presentation (without commentary) |

| |Presentations Greece /Iceland |·    Currency Crisis Links (web link) |

|June 6 |Mundell Fleming Model: Real World Applications |·    Sample Presentation (without commentary) |

| |Presentations Estonia /Ecuador |·    Currency Crisis Links (web link) |

|June 7 |Paper due by 5pm |·    Paper must be submitted in electronic format |

| | |to teclass@u.washington.edu. |

| | |·    I cannot except files that are not in PDF format |

 

Presentation Guidelines

 

1.          The presentation is designed to apply the Mundell Fleming Model to the real world.

2.          Each country is covered by two groups. One group covers the pre crisis events; the other group covers post crisis events.

3.          Each group presents for 25 minutes to leave room for questions.

4.          Presentations must show each step of country’s economic crisis using the Mundell Fleming model. This requires COLLECTION AND PRESENTATION of monthly, quarterly, and annual data on all variables that are important in the Mundell Fleming model (i.e., REAL values of exchange rates, interest rates, income, money supply, and all aggregate demand components, the key BOP components etc ) to correlate the movements of these variables with the model.

5.          Good places to start your research are the reference desk at the library and the IFS (International Financial Statistics database) or via the class website's links.

 

Structure of the Presentation

 

1.          DATA. First deliver a succinct account/outline of the key economic conditions / data in either pre or post crisis (depending on the assignment).  This data must include all variables necessary for the Mundell Fleming model (5 min)

2.          ANALYSIS. Second, analyze the economic performance using the Mundell Fleming Model (10 min)

3.          POLICY. Third, outline which policy measures were (or were not) taken, how the data changed in response to policies, utilizing the Mundell Fleming Model (5 min)

4.          FORECAST. Finally, present a forecast for the country, including policy recommendations, as visualized by the Mundell Fleming model (5 min)

 

A key learning component of the group work is the discussion within your group.  You must work together in synthesizing ideas and graphs, so that one unified picture emerges for the class, while parts 1-5 remain clearly distinguishable.

 

Paper Guidelines

 

Please compose a paper, double spaced, about 5 typed pages long, to cover a currency crisis (pre and post) of one of the countries that we discussed during the presentations part of the course.  The country you cover in your paper cannot be the one that you presented to the class. The paper is again an application of the Mundell Fleming Model. The Paper guidelines are identical to the presentation guidelines above.  This is your chance to show that you can apply the theory to the practice!

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