ECON W3213: Intermediate Macroeconomics

Paul H. Nitze School of Advanced International Studies (SAIS)

The Johns Hopkins University

International Monetary Theory

Spring 2015

Remain UP TO DATE: check BLACKBOARD regularly.

Relevant course material will be posted there.

Class Time: M 8:30-10:30 am

Office Hours: M 10:30-12:30 am

TA tutorials and OHs:

Ignacio Gonzalez ()

Tutorial Time: Thursdays, 11-13pm, room 301

Office Hours: Thursdays, 13-15pm, room 405

Course Requirements

Students must have completed the Macroeconomics course either by passing the course at SAIS or the waiver exam.

Course Description

This course is a graduate level course in international macroeconomics and finance. The main objective of the course is to develop a thorough understanding of how different economies interact and depend on one another. This interdependence is studied mainly through the lenses of capital markets. We will analyze how exchange rates are determined and when and why capital moves from one country to another. The course provides you with a perspective that facilitates a rigorous analysis of different exchange rate regimes and presents the most currently debated issues in international macroeconomics, such as: sovereign debt, currency unions and global imbalances and the financial crisis of 2007-08.

Main Textbook (To be used extensively – purchase suggested - available via Amazon)

Krugman, P., Obstfeld, M. and Melitz M.(2014), International Economics – Theory and Policy, 10th Edition, Pearson-Addison Wesley Publishers, New York.

Secondary Textbook (More Advanced Material – no purchase suggested)

Obstfeld, M. and Rogoff, K. (1996), Foundations of International Macroeconomics, MIT Press

Additional Readings

The course, and especially the second half, will rely heavily on papers and articles.

Additional readings may be announced as the course progresses.

• Exams

There will be a midterm examination and a final examination. The midterm is scheduled for the midterm week following SAIS guidelines. The final exam is cumulative and it will take place during the final exam period in January.

There is no rescheduling.

Both the midterm and the final exam are closed book. Absences from exams are allowed only for validated medical reasons. Unexcused absences from exams will result in a zero score in the calculation of the final grade.

• Problem Sets

I will assign problem sets from time to time. Problem sets will be assigned and will be due the following week in class. Solutions will be posted after due date.

These are an important part of your preparation for the exams. Students are encouraged to work in groups to solve problem sets. However, each student should hand in his own independently written answers by the time and date indicated on each Problem Set.

Late problem sets will not be accepted: there are no exceptions.

All problem sets must be handed in. Problem sets will not be graded but only checked.

Failing to hand in one problem set will result in a 10% penalty over the final grade points.

• Policy Brief

You are required to submit a 1 page brief presenting a topic agreed with your instructor. The topic must be closely related to the material covered during the course and it must also be a currently debated issue in the international macroeconomics policy arena. The objective of the exercise is to help you learn to write very concise reports. You must assume that you are writing the brief for a top policy maker that knows only very limited information about the topic. Your brief should be self explanatory and informative, deliver a policy proposal on the topic and allow the reader to publicly discuss the topic.

• Grading

1. Midterm Exam = 30% of the final score
2. Final Exam = 60% of the final score
3. Bad Day Insurance = Max (Midterm, Final) = 10% of the final score
4. Policy Brief = 10% bonus of the final score for Best Performers

Grading is designed to provide you with partial insurance against a “bad day” performance. For example if one does poorly in the midterm relative to the final, the midterm will be worth 30% of the total grade and the final 60%. If the opposite were to happen, the midterm will count for 40% of the total grade and the final for 50% of the total grade.

• Honor Code

In all courses and all student activities at SAIS, students are expected to adhere to the rules and spirit of the school’s Honor Code, which are detailed in the Student Handbook and posted on-line. In this course, although it is certainly acceptable for students to study together, homework assignments should be completed independently unless they are specifically designated as group assignments. All examinations are “closed book”, meaning that no notes may be used during the examination nor may outside sources be consulted during the exam. The course requires written papers and students should be especially careful to understand what constitutes plagiarism and to avoid it. SAIS makes available to both faculty and students a software program known as Turnitin, which uses a very large data base to identify possible plagiarism. Students are encouraged to use the software as a self-checking mechanism to avoid inadvertent, but inappropriate inclusion of source material. Violation of the Honor Code in an assignment or activity will almost invariably result in failing that assignment and possibly more severe sanctions, including but not limited to course failure, depending on the specific circumstances.

KOM – Krugman, Obstfeld and Melitz

OR – Obstfeld and Rogoff

Additional Readings (* required):

8 & 9. International Monetary System and the Euro Area

Bolton, P. and O. Jeanne, 2005. “Structuring and Restructuring Sovereign Debt: The Role of Seniority”, CEPR Discussion Papers 4901.

Borensztein, E. and M. Chamon, “Sovereign Debt Structure for Crisis Prevention”, IMF Ocasional Papers, 237, 2005.

Broner, F., G. Lorenzoni, and S. Schmukler, “Why do emerging economies borrow short term?” mimeo, CREI, MIT and World Bank, 2010.

* Caballero, R. 2003. “The Future of the IMF”, American Economic Review, Papers and Proceedings, 93(2), pp. 31-38, May.

Jeanne, O., “Debt Maturity and the International Financial Architecture”, American Economic Review, 2009.

* Sachs, J., “Do we need an international lender of last resort?” Frank D. Graham Lecture: Princeton University, 1995

Eichengreen, B., 2003. “Restructuring Sovereign Debt”, Journal of Economic Perspectives 17(4), pp. 75-98.

Rogoff, K. and J. Zettelmeyer, 2002. "Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976–2001," IMF Staff Papers, International Monetary Fund, vol. 49(3), pages 8.

10. Basic Facts on Financial Liberalization and Capital Flows

Eichengreen, B, “Capital Flows and Crises”, MIT Press (2004), Chapters 3, 4

Eswar S. Prasad, Raghuram G. Rajan, and Arvind Subramanian, “Patterns of International Capital Flows and their Implications for Economic Development”, IMF working paper

Lewis, K., “Trying to Explain the Home Bias in Equities and Consumption,” Journal of Economic Literature 37, pp. 571-608, 1999

* Lucas, R., “Why doesn’t capital flow from rich to poor countries?” The American Economic Review 80, pp. 92-6, 1990

Jeanne, Olivier & Pierre-Olivier Gourinchas, 2005. “Capital Flows to Developing Countries: the Allocation Puzzle,” 2009 Peterson Institute for International Economics

* Kose, A., E. Prasad, K. Rogoff, and S. Wei, “Financial Globalization: A Reappraisal,” IMF Working Paper 06/189, 2006.

10.1. Capital Account Liberalization: the role of domestic financial frictions

Aoki, K., G. Benigno and N. Kiyotaki, “Adjusting to Capital Account Liberalization”, CEPR Discussion Paper No 1014, 2010.

Boyd J., and Smith, B., Capital Market Imperfections, International Credit Markets, and Nonconvergence., Journal of Economic Theory 73, 335-364 (1997).

* Broner, F., and J. Ventura, “Rethinking the Effects of Financial Liberalization,” IMF, 2010.

Gertler, M., and K. Rogoff, “North-South lending and endogenous domestic capital market inefficiencies,” Journal of Monetary Economics 26, pp. 245-266, 1990.

Mendoza, E., V. Quadrini and V. Rios-Rull, “Financial Integration, Financial Deepness and Global Imbalances”, NBER Working Paper # 12909, 2007.

11. Currency Crises

* M. Bordo, B. Eichengreen, D. Klingebiel, M.S. Marinez-Peria (2001), “Is the Crisis Problem Growing More Severe?”, Economic Policy, 32, pp. 53-75.

Frankel, Jeffrey A. and Andrew K. Rose, 1996, “Currency Crashes in Emerging Markets: An Empirical Treatment,” Journal of International Economics, 41, 351-368.

Milesi-Ferretti, Gian Maria and Assaf Razin, 1998, “Current Account Reversals and Currency Crises: Empirical Regularities,” NBER Working paper No. 6620.

First Generation Models

Calvo, Guillermo, 1987, “Balance of Payments Crises in a Cash-in-Advance

Economy,” Journal of Money, Credit and Banking, 19, 19-32.

* Krugman, Paul, 1979, “A Model of Balance of Payment Crises,” Journal of Money,

Credit and Banking, 11, 311-325.

Second Generation Models

* Obstfeld, M., “Rational and self-fulfilling balance-of-payments crises,” American Economic Review 76, Mar. 1986, 72-81.

Krugman, P., “Are currency crises self-fulfilling?” in B. Bernanke and J. Rotemberg (eds.), NBER Macroeconomics Annual 1996, 345-78.

12. Sovereign Risk

Sturzenegger, Federico, and Zettelmeyer, Jeronim, Debt Defaults and Lessons from a Decade of Crises, MIT Press, December 2006.

Aguiar, M., and M. Amador, “Growth in the Shadow of Expropriation”, Quarterly Journal of Economics, 2011 (126).

* Broner, F., A. Martin, and J. Ventura, “Sovereign risk and secondary markets,” American Economic Review, 2010.

* Bulow, J., and K. Rogoff, “Sovereign debt: Is to forgive to forget?” American Economic Review 79, Mar. 1989, 43-50.

Eaton, J., and M. Gersovitz, “Debt with potential repudiation: Theory and empirical analysis,” Review of Economic Studies 48, Apr. 1981, 289-309.

* Gennaioli, N., A. Martin and S. Rossi, “Sovereign defaults, banks and financial institutions”, 2010.

* Sandleris, G., “Sovereign Defaults: Information, Investment, and Credit”, Journal of International Economics, 2008.

Sturzenegger, Federico, and Zettelmeyer, Jeronim, Debt Defaults and Lessons from a Decade of Crises, MIT Press, December 2006.

Amador, M., “A political economy model of sovereign debt repayment,” mimeo, Stanford, 2003.

12.1. Debt Crises and Contagion

* Sachs, J. (1989). “The Debt Overhang of Developing Countries”, in Jorge de Macedo and Ronald Findlay (eds), Debt, Stabilization and Development: Essays in Memory of Carlos Dias Alejandro. Oxford: Blackwell, 80-102.

Chamon, M., “Can debt crises be self-fulfilling?” IMF Working Paper 04/99, Jun. 2004.

* Kaminsky, G., C. Reinhart, and C. Végh, “The unholy trinity of financial contagion,” Journal of Economic Perspectives 17, pp. 51-74, 2003

Hernández, L., and R. Valdés, “What Drives Contagion: Trade, Neighbourhood, or Financial Links?” IMF Working Paper 01/29, 2001

Calvo, G., and E. Mendoza, “Rational contagion and the globalization of security markets,” Journal of International Economics 51, Jun. 2000, 79-113.

Broner, F., G. Gelos, and C. Reinhart, “When in peril retrench: Testing the portfolio channel of contagion,” Journal of International Economics, 69 (2006).

Broner, F., and R. Rigobon, “Why are capital flows so much more volatile in emerging than in developed countries?” in External Financial Vulnerability and Preventive Policies

(Eighth Annual Conference of the Central Bank of Chile), 2004.

12.2. Sudden Stops: Theory and Evidence

Calvo, G., A. Izquierdo and Luis-Fernando Mejia, 2004, “On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects,” NBER Working paper No. 10520.

Kaminsky, Graciela and Carmen M. Rienhart, 1999. “The Twin Crises: The Cause of Banking and Balance-of-Payments Problems,” American Economic Review, 89, 473-500.

Kaminsky, G., C. Reinhart, and C. Vegh, 2004. “When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies”, NBER WP No. 10780.

13. Financial Frictions, the Crisis and International Capital Flows

Arcand, JL, E Berkes, and U Panizza (2011), “Too Much Finance?”

* Caballero, R., “The Other Imbalance and the Financial Crises”, 2010, NBER Working Paper No. 15636.

Caballero, R. and A. Krishnamurthy, 2001. “International and Domestic Collateral Constraints in a Model of Emerging Market Crises”, Journal of Monetary Economics 48 (3), pp. 513-548.

Caballero, Ricardo, Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. “An Equilibrium Model of 'Global Imbalances' and Low Interest Rates,” CEPR Discussion Papers 5573, C.E.P.R. Discussion Papers

* Martin, A. and F. Taddei, “International Capital flows and credit market imperfections: a tale of two frictions”, Journal of International Economics (2013).

Song, Z., K. Storesletten and F. Zilibotti, “Growing Like China”, American Economic Review, 101, Feb. 2011

* Ventura, J., and Kraay, A., “The Dot-Com Bubble, the Bush Deficits, and the US Current Account”, in G7 Current Account Imbalances: Sustainability and Adjustment, R. Clarida (eds.), 2007, The University of Chicago

Gourinchas, Pierre-Olivier and Maurice Obstfeld, 2012. “Understanding past and future financial crises”, VoxEU (

Brunnermeier, Markus K. 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008." Journal of Economic Perspectives, 23(1): 77–100.

Hall, Robert E. 2010. "Why Does the Economy Fall to Pieces after a Financial Crisis?" Journal of Economic Perspectives, 24(4): 3–20.

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