ECON553 Hélène Rey
PrincetonUniversity, Spring 2004
Course Schedule
Classes will be held every Tuesday and Thursday from 2:40 to 4:10.
Grading Policy
Midterm Exam (40% of grade). There will be one problem set before to prepare you for the midterm.
Short report and presentation (60% of grade). Class participants will be asked towards the end of the course to choose one paper among a small selection and give a short presentation on that paper with a written support. Students will be expected to have thoroughly understood the paper’s content, methodology and techniques. Following the presentation a short and creative report of at most 15 double spaced pages on the paper presented will be due. This is probably the exercise you will learn most from. You should take it very seriously. A paper may come out of it!
Papers are chosen on a first come first served basis. Depending on the number of students, the presentations and reports will be either individual or by groups of 2 students.
Course Material
The textbook for the course is Foundations of International Macroeconomics, by Maurice Obstfeld and Kenneth Rogoff, MIT Press, October 1996.
It is available at the U-Store, as well as at and
Another useful reference is "International Macroeconomics and Finance: Theory and Empirical Methods" by Nelson Mark, Blackwell Publisher, September 2001.
Reading List
The following reading list gives a guide to the material that will be covered in the course. Most articles are available on-line. Articles un-available online will be available in the Graduate Economics Reading Room (A-18-D2 in Firestone library) or in the journals themselves (available in Firestone and often, in the Robertson Hall library in WWS).
The web page for this class is This syllabus is available under course information.
1)Introduction to open economy economics
*Mark, chapter 1.
*Obstfeld (2001): "International Macroeconomics: Beyond the Mundell-Fleming Model" [p 1-14], at
2)Intertemporal approach to the current account
*Obstfeld -Rogoff chapters 1 and 2;
Krugman P.: "Has the adjustment process worked?", Oct 1991, Policy analyses in international economics 34, Institute for International Economics.
*Obstfeld M. and K. Rogoff, "The Intertemporal Approach to the Current Account", in Handbook of International Economics, Gene Grossman and Ken Rogoff, ed, North Holland, 1995.
Glick R. and K. Rogoff, “Global versus Country-Specific Productivity Shocks
and the Current Account”, Journal of Monetary Economics, 1995, 35 (1), 159—92.”
Nason J. and J. Rogers, “The Present-Value Model of the Current Account
Has Been Rejected: Round Up the Usual Suspects,” May 2002, mimeo, Federal Reserve Board.
*Kraay, A. and J. Ventura, "Current Accounts in Debtor and Creditor Countries", Quarterly Journal of Economics, November 2000.
Ventura J. : “A Portfolio View of the U.S. Current Account Deficit,” in “Brookings Papers on Economic Activity” 2001, pp. 241—53.
Mercereau, B. : “The Role of Stock Markets in Current Account
Dynamics: a Time Series Approach”, BE Press, Topics in Macroeconomics, 2003, Vol 3, Issue 1.
*Gourinchas and Rey: “International Financial Adjustment”,
*Razin, Assaf and Lars Svensson, “The Terms of Trade and the Current Account: The
Harberger-Laursen-Metzler Effect,” Journal of Political Economy, February 1983, 91 (1),
97—125.
3)International Business Cycle Models. International financial markets and risk sharing
*Obstfeld-Rogoff, chapter 5.
Mark, chapter 6
*Lucas R., "Interest Rates and Currency Prices in a Two-Country World", Journal of Monetary Economics, 10, 335-59, 1982.
Svensson, Lars, 1985, “Currency prices, terms of trade and interest rates: a general equilibrium asset-pricing cash-in-advance approach”, Journal of International Economics, vol 18, 17-42
*Baxter, Marianne, 1995, International Trade and Business Cycles, National Bureau of
Economic Research Working Paper: 5025. p 44. February
*Backus, David K; Kehoe, Patrick J; Kydland, Finn E., International Business Cycles: Theory and Evidence, National Bureau of Economic Research Working Paper: 4493. p 23. October 1993, also in Cooley, Frontiers of Business Cycle Research.
Stockman, Alan, New Evidence Connecting Exchange Rates to Business Cycles
*Mendoza E. , “Real Business Cycles in a Small Open Economy: The Canadian Case,” American Economic Review (1991)
*Cole H. and M. Obstfeld: " Commodity Trade and International Risk Sharing: How much do Financial Markets Matter?", Journal of Monetary Economics 28 (August): 3-24, 1991.
*Van Wincoop: "How Big are Potential Gains from International Risk Sharing?", Journal of International Economics 47, 1999, 109-135.
*Obstfeld, M, "Risk-taking, global diversification, and growth", American Economic Review, 84, pp. 1310-29.
*International Monetary Fund: Prasad E. Rogoff K., Wei S.J. and Kose A.: “Effects of Financial Globalization on Developing Countries: Some Empirical Evidence”, March 2003.
*Gourinchas P.O. and O. Jeanne: “The Elusive Gains of International Financial Integration”, 2003, CEPR DP 3902.
Justiniano, A.: “Sources and Propagation Mechanisms of Foreign Disturbances in Small Open Economies: A Dynamic Factor Analysis”, 2003 PhD dissertation PrincetonUniversity.
Financial Market imperfections. Sudden Stops
Martin P. and H. Rey: "Financial Super-Markets: Size matters for asset trade", Journal of International Economics,
Martin P. and H. Rey: "Financial Integration and Asset Returns", European Economic Review June 2000, (44/7), p. 1327-1350
*Martin P. and H. Rey: “Financial Globalization and Emerging Markets: With or without Crash?”, 2002,
Matsuyama, K.: “Financial market globalization, symmetry-breaking and endogenous inequality of nations”, Econometrica May 2004.
Mendoza and Smith: Margin Calls, Trading Cost, and Asset Prices in Emerging Markets: The Financial Mechanics of the 'Sudden Stop' Phenomena at
Arellano and Mendoza, “Credit Frictions and 'Sudden Stops' in Small Open Economies: An Equilibrium Business Cycle Framework for Emerging Markets Crises,” NBER 8880, 2002
Kehoe, Patrick and Perri, Fabrizio, 2001, International Business Cycles with Endogenous Incomplete Markets,
4)Is capital mobile internationally? Home bias
*Feldstein, M. and C. Horioka, "Domestic Savings and International Capital Flows" Economic Journal
90 (June): 314-29, 1980
*Frankel, J.: "Measuring International Capital Mobility", American Economic Review Papers and Proceedings, May 1992, 197-202.
*Baxter M. and M. Crucini: “Explaining Saving –Investment Correlations”, American Economic Review June 1993, p 416-436.
*Obstfeld M. and K. Rogoff, "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?", NBER Macro Annuals 2001.
Lewis K., "Puzzles in International Financial Markets" in Handbook of International Economics, Gene Grossman and Ken Rogoff, ed, North Holland, 1995 also NBER WP 4951.
*Lewis K., "International Home Bias in International Finance and Business Cycles", NBER WP #6351, January 1998, or with the title "Trying to Explain Home Bias in Equities and Consumption" Journal of Economic Literature 37, June 1999, 571-608.
*French and Poterba, 1991 'Investor diversification and international equity markets', American Economic Review81, 222-226.
Baxter and Jerman, "The international diversification puzzle is worse than you think", American Economic Review, 1997.
Adler, M. and B. Dumas, 1983, "International Portfolio Choice and Corporation Finance: a Synthesis," The Journal of Finance, 38, 925-984.
Brennan and Cao, 1997, ‘International portfolio investment flows’, Journal of Finance52, 1851-1880.
*Tesar L. and I. Werner, "Home Bias and High Turnover", Journal of International Money and Finance 14 (August): 467-92 1995.
*Portes and Rey, 2001: "Determinants of Cross Border Equity Flows", at
Kray, A., Loayza, N., Serven, L. and J. Ventura "The Portfolio of Nations", NBER WP 7795 July 2000.
Lane P. and G. M. Milesi-Ferretti, "The External Wealth of Nations: Measure of Foreign Assets and Liabilities for Industrial and Developing Countries," International Monetary Fund Working Paper WP/99/115, August 1999.
*Lane P. and G. M. Milesi-Ferretti: International Financial Integration, CEPR DP 3769.
Imbs, J.: Trade, Finance, Specialization and Synchronization, mimeo LBS, February 2003
5)Real exchange rate, PPP and law of one price
*Obstfeld and Rogoff Chapter 4
*Rogoff K. "The Purchasing Power Parity Puzzle", Journal of Economic Literature Vol. 34, No. 2. (Jun., 1996), pp. 647-668.
Froot K. and K. Rogoff, "Perspectives on PPP and Long-Run Real Exchange Rates", in Handbook of International Economics, Gene Grossman and Ken Rogoff, ed, North Holland, 1995 also NBER WP 4952.
*Mark, N., 1995, Exchange rates and fundamentals: evidence on long-horizon predictability, American Economic Review, March, 201-218.
Wei Shan-Jin David C. Parsley: Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprit, NBER WP 5032.
*Engel C. "Accounting for US Real Exchange Rate Changes," Journal of Political Economy 107(3), June 1999, pages 507-38.
*Imbs, Mumtaz, Ravn and Rey, “PPP Strikes Back: Aggregation and the Real Exchange Rate”, 2004 at
Chen S.S and C. Engel, “Does aggregation bias explain the PPP puzzle?”, 2004, NBER WP 10304.
Imbs, Mumtaz, Ravn and Rey, “Aggregation bias does explain the PPP puzzle”, 2004, at
Law of one price:
Crucini and Shintani: Persistence in Law of one price deviations: evidence from micro data, mimeo Van der Bilt University.
Crucini M., Zachariadis and C. Telmer: Cross-sectional variation in European real exchange rates:1975-1990, mimeo Van der Bilt University.
Engel C. and J. Rogers, "How Wide is the Border?" American Economic Review 1996 Dec, pp1112-1125.
Imbs et al: “Price convergence in Europe: What’s on TV?”, at
Goldberg P. and M. Knetter "Goods Prices and Exchange Rates: What have we learned?" Journal of Economic Literature 35(3), September 1997, pages 1243-72.
Non-linear models:
Dumas B, 1999. Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World, Review of Financial Studies, vol 5(2), pp153-180.
*Sarno, M. Taylor and I. Chowdhury: Nonlinear Dynamics in Deviations from the Law of One Price: A Broad-Based Empirica: Study, Journal of International Money and Finance.
*Kilian L. and Taylor M.: “Why is it so difficult to beat the random walk forecast of exchange rate?”, CEPR DP 3024.
Balassa Samuelson:
*Matthew B. Canzoneri, Robert E. Cumby and Behzad Diba, "Relative Labor Productivity and the Real
Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries", Journal of International Economics, Volume: 47, Issue: 2, April 1, 1999.
6)Exchange rate models: Short-run
*Obstfeld–Rogoff , 8.2.7
Mark chapter 3
*Meese R. and K. Rogoff, “Empirical Exchange Rate Models of the Seventies”, Journal of International Economics 14 3-24, 1983
*Frankel J. and A. Rose, "Empirical research on Nominal Exchange Rates", in Handbook of International Economics, Gene Grossman and Ken Rogoff, ed, North Holland, 1995 also NBER WP 4865.
Sticky price models:
*Dornbusch, Rudiger, 1976, Expectations and Exchange Rate Dynamics, Journal of Political Economy. Vol. 84 (6). p 1161-76. Dec.
*Obstfeld M. and K. Rogoff: "Exchange rate dynamics redux", JPE 103, 624-60, 1995.
*Corsetti G. and P. Pesenti: "Welfare and Macroeconomic Interdependence", NBER WP 6307, 1998, also at and Quarterly Journal of Economics.
*Kollman, R. (1997), "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal
Rigidities: A Quantitative Investigation," International Monetary Fund Working Paper 97/7.
*Betts C. and M. Devereux: "Exchange rate dynamics in a model of pricing-to-market", JIE 47, 569-598, 1998.
*Obstfeld M. and K. Rogoff: "New Directions for Stochastic Open Economy Models", JIE, February 2000 and NBER WP 7313 and at
*Chari, V V, Kehoe, Patrick J, McGrattan, Ellen R., 2002, Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates, The Review of Economic Studies
Cheung Y, M. Chinn, A. Pascual: Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?, NBER WP 9393.
Duarte M. and A. Stockman, 2001. Rational Speculation and Exchange Rates, NBER WP 8362.
7)Equity and exchange rate markets:
*Hau and Rey : “Equity Prices, exchange rates and capital Flows” at
Hau and Rey: Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates? forthcomingAmerican Economic Review P&P, May 2004 at
Brandt M., Cochrane J. and P. Santa Clara, 2001. International Risk Sharing is better than you think (or exchange rates are much too smooth), NBER WP8404.
Pavlova Rigobon: “Exchange rate and asset prices”, mimeo MIT.
Serrat A.: “Non traded goods and the non diversification puzzle”, Econometrica 2001.
8)Foreign Exchange Microstructure and empirical evidence on capital flows and exchange rates.
Lyons R, 2001. The Microstructure Approach to Exchange Rates, MIT Press.
*Evans M. and R. Lyons, 2001. Order Flow and Exchange Rate Dynamics, NBER WP7317, Journal of Political Economy at
Rime D., 2001. Private or Public Information in the Foreign Exchange Markets? An Empirical Analysis. At
Killeen W., Lyons R and M. Moore, 2001. Fixed versus Floating Exchange Rates: Lessons from order flow, at
*Froot K. and T. Ramadorai, 2001. “Currency Return, Institutional Investor Flows and Exchange-Rate Fundamentals”,
at
9)Forward premium puzzle:
*Fama, Eugene 1984. Forward and spot exchange rates. Journal of Monetary Economics, vol. 14, 319-338.
*Backus David, Silverio Foresi, and Chris Telmer 1998. A¢ne models of currency pricing: Accounting for the forward premium anomaly,
*Gourinchas, P. and A. Tornell 2004. Exchange Rate Puzzles and Distorted Beliefs, forthcoming, Journal of International Economics at
Alvarez F., Atkeson, A. and P. Kehoe 2001. Volatile Exchange Rates and the Forward Premium Anomaly: A Segmented Asset Market View,
at
*Frankel, Jeffrey and Kenneth Froot, .Forward Discount Bias: Is it an Exchange Risk Premium?,. Quarterly Journal of Economics, 1989, 104, 139.161.
10)Speculative attacks,
Obstfeld and Rogoff chapters 8.4 and 9.5.4
Krugman, P.: "A Model of Balance of Payments crises", Journal of Money, Credit and Banking 11, 311-325, 1979.
Krugman, P.: "Are Currency Crises Self-Fulfilling?", NBER Macroeconomics Annual, pp. 345-407, 1996.
Flood R. and P. Garber: "Collapsing exchange rate regimes: some linear examples", Journal of International Economics 17, 1-13, 1984.
Obstfeld, M.: "The Logic of Currency Crises”, Cahiers Economiques et Monétaires 43, Banque de France, 1994.
Obstfeld, M.: "Models of Currency Crises with Self-fulfilling Features", European Economic Review 40, 1037-47.
Obstfeld, M.: "Open-Economy Macroeconomics; Developments in Theory and Policy", NBER WP #6319, or Scandinavian Journal of Economics, December 1997.
Morris S. and H. S. Shin: "Unique equilibrium in a model of self-fulfilling currency attacks", American Economic Review 1998.
Heinemann, F.: "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review 90 (March 2000), 316-18.
Corsetti, G., Dasgupta, A., Morris S. and H. S. Shin "Does One Soros Make a Difference? A Theory of Currency Crisis with Large and Small Traders", mimeo Yale.
Krugman P.: " Balance sheets, the transfer problem, and financial crises " at
Aghion P., P. Bacchetta and A. Banerjee: "Capital Markets and the Instability of Open Economies" CEPR DP 2083.
Jeanne O.: "Currency crises: A perspective on Recent Theoretical Developments", CEPR DP 2170, June 1999 or Special Papers in International Economics, Princeton International Economics Section, March 2000.
Chang R. and A. Velasco: " Liquidity Crises in Emerging Markets: Theory and Policy ", NBER WP 7272, July1999
Chang R. and A. Velasco,"Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, forthcoming
Empirical studies:
Eichengreen B., Rose A. and C. Wyplosz: " Contagious Currency Crises", NBER WP.
Kaminsky G. and C. Reinhardt, "The Twin Crises: The Causes of Banking and Balance of Payments Problems" American Economic Review.
11)New Open economy Macroeconomics
*Obstfeld Rogoff: Chapters 8-9-10.
Papers listed at
Betts C. and M. Devereux: "The exchange rate in a model of pricing-to-market", EER 40, 1007-1021, 1996.
*Betts C. and M. Devereux: "Exchange rate dynamics in a model of pricing-to-market", JIE 47, 569-598, 1998.
*Corsetti G. and P. Pesenti: "Welfare and Macroeconomic Interdependence", NBER WP 6307, 1998, also at and forthcoming Quarterly Journal of Economics.
Hau, H.: "Exchange Rate Determination under Factor Price Rigidities", Journal of International Economics, Vol. 50 (2000), No. 2, 421-447 or at .
*Hau H.: "Real exchange rate volatility and economic openness: theory and evidence", mimeo, CEPR DP 2115, 1999 or at
Lane, P.: "The New Open Economy Macroeconomics: A Survey," CEPR Discussion Paper #2115, March 1999, and forthcoming JIE.
*Obstfeld M. and K. Rogoff: "Exchange rate dynamics redux", JPE 103, 624-60, 1995.
Obstfeld M. and K. Rogoff: "Risk and Exchange Rate", NBER WP 6694, 1998 and at
*Obstfeld M. and K. Rogoff: "New Directions for Stochastic Open Economy Models", JIE, February 2000 and NBER WP 7313 and at
Tille C.: "'Beggar-thy-Neighbor' or 'Beggar-thyself'? The Income Effect of Exchange Rate Fluctuations", Federal Reserve Bank of New York, July 2000 at
12)Monetary and exchange-rate policy in open economies.
Papers listed at
Aghion P., Bachetta P. and A. Banerjee: “Currency Crises and Monetary Policy in an Economy with Credit Constraints”, mimeo March 2000 at
Benigno G. and Benigno P.: "Monetary Policy Rules and the Exchange Rate" May 2000 at
Benigno G. and Benigno P.: "Price stability as a Nash Equilibrium in Open Economy", CEPR DP April 2001.
*Corsetti G., and P. Pesenti : "International Dimensions of Optimal Monetary Policy", NBER WP 8230, April 2001.
Corsetti G., Pesenti P., Roubini N. and C. Tille: "Competitive Devaluations: A Welfare-Based Approach'', Journal of International Economics 51, June 2000, pp. 217-241 also: NBER Working Paper 6889, January 1999 and at
*Devereux M., and C. Engel: “Monetary Policy in the Open visited: Price Setting and Exchange Rate Flexibility”, October 1998 at
Devereux M. and Lane P.: “Exchange Rate Regime and Monetary Policy Rules for Emerging Markets”, July 2000, at
*Eichengreen, B. (2001): "Can Emerging Markets Float? Should they inflation target?", UC Berkeley mimeo, March 2001
Engel, C. (2000), "Optimal Exchange Rate Policy: The Influence of Price Setting and Asset Markets," NBER Working Paper 7889, September.
*Gali, Jordi and Tommaso Monacelli (2000), "Optimal Monetary Policy and Exchange Rate Variability in a Small Open Economy," mimeo BostonCollege at
Kumhof, M. (2000): "Inflation targeting and exchange rate flexibility", Stanford university, mimeo.
Leitmo,Kai and Ulf Söderström (2000): "Simple monetary policy rules and exchange rate uncertainty,"
mimeo, Norges Bank and Sveriges Riksbank.
Leitmo Kai (1999),"Inflation Targeting Strategies in Small Open Economies," June 1999. Department of
Economics, University of Oslo, working paper 21/99 at
*Obstfeld M. and K. Rogoff (2000): "Do We Really Need a New Global Monetary Compact", mimeo UC Berkeley and HarvardUniversity at
Sutherland, Alan (2000): " Inflation Targeting in a Small Open Economy", CEPR DP 2726.
*Svensson, Lars (2000): " Open Economy inflation targeting", JIE, 50, 155-184.
Tille C.: "Is the integration of world asset markets necessarily beneficial?", Federal Reserve bank of New York, July 2000.
Weerapana, Akila (1998), "Monetary Policy Interactions Between the U.S. and the EMU," mimeo,
Department of Economics, WellesleyCollege at
Weerapana, Akila (1998), "The Performance of Simple Monetary Policy Rules in a Large Open Economy,"
Department of Economics, WellesleyCollege Working Paper #2000-05.
13)Quantitative evaluation and empirical evidence
Bergin P., "How well can we explain the current account in terms of optimizing behaviour," mimeo, UC Davis, December 1999
*Bergin P., "Putting the New Economy Open Macroeconomics to a Test",
*Bergin P. and Feenstra R., "Pricing to Market, Staggered Contracts, and Real Exchange Rate Persistence", NBER Working Paper 7026, revised February 2000.