Course Description

International Macroeconomics and Finance
PAI 600/ECN 566
Fall 2015
Dr. Stuart Brown
323 Eggers Hall
Thursday 9:30-12:15pm

Course Description:

The course will attempt to simulate – as much as is possible in a classroom setting --a recent graduate’s experience on a London or New York trading floor at a prototypical, global investment bank. Imagine yourself working as an economist or bond strategist trainee alongside bond, currency and options traders, structured product specialists and salespeople in the bank’s emerging market fixed income division. Within close approximation to you on the trading floor are G-10 government bond and currency traders, investment grade and high yield credit specialists, new issue underwriters and the derivatives desk offering interest rate swaps and credit default protection. Competing for your attention are Excel spreadsheets, multiple television screens, Reuters and Bloomberg terminals with the latest financial, economic and political news. Someone is shouting at you to get on the phone with a client, send a Bloomberg message with your instant reaction to an event, or to whip out a 2-pager on the market implications of a statistical release. Your job is to advise the trading desk and the bank’s institutional clients when to buy or sell specific sovereign (corporate) bonds or currencies. Your mind reflects an ongoing tug-of-war between the short-run world of rumors, market momentum, or financial “technicals,” on the one hand, and the medium-term world of macroeconomic and political fundamentals, on the other. You must always have a view on whether the market is under- or over-discounting a country’s probability of defaulting on specific financial obligations. As long as you express a consistent perspective clearly and confidently, you can be wrong – but if you want to keep your job not too often!

That is something what it is like on the trading floor of a major sell-side financial institution. As for the next best thing – the classroom – please see below.

Course Plan:

The course seeks to cover some of the main contemporary issues at the intersection of international macroeconomics and finance. With the fallout of the financial crisis still with us, this remains an extraordinary and highly uncertain time for the global economy. There remain major questions over the pace of economic recovery, the effectiveness of monetary and fiscal policies and the potential global impact of ongoing events such as the European debt crisis. We will be covering events as they unfold during the course of the semester. While our main vantage point on the financial sector will be the trading floor, we will want to explore how bond investors (sometimes called bond “vigilantes”) relate to other major players – in particular, national policymakers, international financial institutions (particularly the International Monetary Fund), the major credit rating agencies and various international forum such as the G-20 representing key players in the global economy. The course attempts to relate the mindset of these actors in the context of a rapidly evolving global economy subject to periodic crises and longer-term structural change.

The course is divided into four parts of varying lengths. First an extended introductory segment sets the stage by providing an overview of global economic developments with a reading from the International Monetary Fund’s most recent flagship publication, the World Economic Outlook. This will allow us to review the origins of the recent global financial crisis and how it continues to impact the global economy today.

In particular, among the purported core causes of the Great Recession has been a long-standing structural disequilibrium in the global system referred to as “global economic imbalances.” The latter refers mainly to the coincidence of large current account deficits in the United States, on the one hand, and large current account surpluses in emerging Asia, in certain European Monetary Union (EMU) member countries - notably Germany - and among net energy exporters on the other. We will use the debate around global imbalances to introduce some basic macroeconomic identities and relationships that will be employed throughout the course. In addition, we will take a look at chronic pressures within the EMU with an emphasis on the ongoing situation in Greece and its parallels to an earlier crisis in Argentina.

The second segment of the course focuses on how financial market economists and strategists think about the world, process information and make investment “calls.” Analyzing several case studies, we will zero in on two important sectors of the global capital markets – bonds and currencies. We will study the basics of bond analytics – including issues of discounting future cash flows, yield to maturity, duration and convexity - and how foreign exchange (currency) markets function. This will help us appreciate the basic determinants of debt sustainability – the ability and willingness to service debt. In the process we will learn about the main players in the game of international finance, from sovereign (debt) issuers and macroeconomic policy makers to global investment bank underwriters and traders of sovereign debt to the credit rating agencies and the International Monetary Fund.

The third segment of the course will provide a broad overview of open-economy macroeconomic principles, with special emphasis on the balance of payments and exchange rate issues. (Certain core concepts will have already been introduced at the beginning of the semester but we will study these issues in greater depth here). Discussions will center on the inter-connection between private savings and investment, fiscal and monetary policies, interest rates, exchange rates and global capital flows.

The fourth and (brief) final segment of the course concerns the rudiments of financial market crisis theory and experience. We will review the principal models of sovereign financial crisis. In addition, the recent debates over “currency wars” and “secular stagnation” will be explored. Your final assignment will be to analyze an actual financial crisis in Latin America, Europe, Asia or Africa sometime during the period 1980-2015. You will be required to assess the relevance of financial crisis theory to this specific crisis – e.g. the Russian crisis of 1998 – analyze the macroeconomic data for signs of early warning indicators and evaluate the coherence (or lack thereof) of the policymakers’ response to the crisis.

Grading:

The Grade for the course will be determined as follows:

· Group Presentation and Paper: 35%

· Midterm Examination: 35%

· Problem Sets: 15%

· Class Participation: 15%

· Extra Credit Options (to be mentioned in class)

Books and other readings:

The required books and the course reader can be purchased at the Schine Student Center University Bookstore.

The required texts are

- Robert C. Feenstra, Alan M. Taylor, James Taylor. International Macroeconomics Third Edition. Worth Publishers 2015.

- Martin Wolf. The Shifts and the Shocks: What We’ve Learned-and Have Still to Learn-from the Financial Crisis. Penguin, 2014.

Recommended Supplementary Texts:

For a comprehensive overview and analysis of the history of debt see Carmen M. Reinhart and Kenneth Rogoff, This Time is Different: Eight Centuries of Financial Folly.

For an incisively critical, insider’s view of derivatives trading, you may want to consult Satyajit Das’s Traders. Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives. FT Prentice Hall, 2006.

For a comprehensive analysis of the issues involved in resolving financial crises in emerging economies, see Nouriel Roubini and Brad Setser, Bailouts or Bail-Ins?: Responding to Financial Crises in Emerging Economies. Peterson Institute for International Economics (formerly the Institute for International Economics), Washington, D.C., August 2004. For an examination of the Asian financial crisis as well as Great Recession see Andrew Sheng. From Asian to Global Financial Crisis: An Asian Regulator’s View of Unfettered Finance in the 1990s and 2000s. Cambridge University Press, 2009.

Group Presentation Assignment

All students will be asked to participate in a group presentation on an actual financial crisis in a specific emerging market country. You will be expected to generate a power point presentation and relevant class handouts. The purpose of the presentation is to outline the unique contributors, manifestations and policy responses to each crisis. Your grade will rest significantly on how creatively you apply the theoretical principles discussed in class and how astutely you evaluate the macroeconomic and financial data (including early warning indicators) for your country.

The presentation should comprise four parts:

1. Using the theoretical framework developed in class concerning the determinants of financial crisis, describe the longer-term origins and more immediate precipitating factors underlying the crisis. Which generation of financial market crisis theory is most relevant to your crisis?

2. Describe the specific nature of the crisis itself. Did the crisis manifest itself as a currency collapse, an implosion of the banking or non-bank financial system, sovereign debt default or all of the above? If the latter, how did one manifestation of financial crisis trigger or feed on another?

3. Assess the policy response to the crisis. Specifically, were there obvious early warning indicators of an impending crisis? Did the policymakers’ response to these indicators, and later the outbreak of the crisis, tend to aggravate or instead contain the ultimate severity of the crisis?

4. Summarize the principal lessons of your chosen country’s experience with financial market crisis.

Some Useful Websites and Podcasts

For a comprehensive list of economics and political economy blogs, see the EconoMonitor’s Economics Blog Aggregator: http://www.economonitor.com/aggregator/. EconTalk is an excellent podcast and as a big fan of podcasts I am happy to make additional recommendations relevant for the course (and other topics).

Disability-Related Accommodations

Students who are in need of disability-related academic accommodations must register with the Office of Disability Services (ODS), 304 University Avenue, Room 309, 315-443-4498. Students with authorized disability-related accommodations should provide a current Accommodation Authorization Letter from ODS to the instructor and review those accommodations with the instructor. Accommodations, such as exam administration, are not provided retroactively; therefore, planning for accommodations as early as possible is necessary. For further information, see the ODS website, Office of Disability Services: http://disabilityservices.syr.edu/

Academic Integrity

The Syracuse University Academic Integrity Policy holds students accountable for the integrity of the work they submit. Students should be familiar with the Policy and know that it is their responsibility to learn about instructor and general academic expectations with regard to proper citation of sources in written work. The policy also governs the integrity of work submitted in exams and assignments as well as the veracity of signatures on attendance sheets and other verifications of participation in class activities. Serious sanctions can result from academic dishonesty of any sort. For more information and the complete policy, see http://academicintegrity.syr.edu.

Religious Observance

SU’s religious observances policy, found at http://supolicies.syr.edu/emp_ben/religious_observance.htm, recognizes the diversity of faiths represented among the campus community and protects the rights of students, faculty, and staff to observe religious holy days according to their tradition. Under the policy, students are provided an opportunity to make up any examination, study, or work requirements that may be missed due to a religious observance provided they notify their instructors before the end of the second week of classes. For fall and spring semesters, an online notification process is available through MySlice/Student Services/Enrollment/My Religious Observances from the first day of class until the end of the second week of class.

Course Schedule and Reading Assignments[1]

SEPTEMBER 3

I. Introduction

a. Overview of Global Financial Crisis of 2007-2009 and aftermath

b. Course Overview

Recommended Readings and Podcasts.

i. Gary Gorton and Andrew Metrick “Getting Up to Speed on the Financial Crisis: A One-Weekend-Reader’s-Guide.” Journal of Economic Literature. 2012, 50:1, 128–150.

ii. http://www.nber.org/papers/w17778.pdf (available when logged in on campus)

iii. Listen to podcasts on the LIBOR scandal: Peterson Perspectives (from the Peterson Institute for International Economics): July 11, 12 and 13 2013.

SEPTEMBER 10

II. Key Developments in the Global Economy Today

Required Readings:

i. IMF, World Economic Outlook, Chapter 1, April 2015 http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c1.pdf

ii. Feenstra and Taylor: Chapter 1: The Global Macroeconomy

iii. Begin reading Martin Wolf.