There are two excellent textbooks for this course that complement each other, the first one with a focus on theory and the second one on empirics. They are recommended as essential reading (see below) but cannot, and will not, be covered in full during lectures. In addition, two other useful books are suggested as supplementary reading on a number of topics (see below). Other bibliographical sources, including book chapters and journal articles, are proposed as background reading, more precisely on certain aspects of the course (as described further down).
The choice of required and recommended material is aimed at laying the theoretical and empirical foundations a graduate student needs to understand the modern open-economy literature and be able to embark on own research. For those who are particularly interested in the subject matter, the most (directly) relevant specialised journals and websites are selected from the multitude of existing ones: these contain articles and data, often downloadable in suitable formats.
Lecture notes and their essential structure in the form of presentation slides (to be discussed in class) are posted in pdf version on this course website. Any feedback will be appreciated.
1. Obstfeld, Maurice and Kenneth Rogoff, Foundations of International Macroeconomics, MIT Press, 1996 - uses modern analytical methods to develop a (first) coherent framework for the study of a wide range of fundamental issues related to the interdependence of open economies; a companion website to this comprehensive treatise with solution guide to end-of-chapter problems can also be consulted.
2. Mark, Nelson, International Macroeconomics and Finance: Theory and Econometric Methods, Blackwell, 2001 - a compact, balanced and insightful account of the most influential theory and empirics in international macroeconomics; a companion website to this lucid textbook with a number of downloadable Gauss programmes can be consulted as well.
1. Gandolfo, Giancarlo, International Finance and Open-Economy Macroeconomics, Springer, 2001 - a wonderful reading, and a major reference book, on both the intellectual history and the analytics of the most prominent lines of research in open-economy macroeconomics.
2. Sarno, Lucio and Mark Taylor, The Economics of Exchange Rates, Cambridge University Press, 2002 - at present, the most updated and synthetic survey of the literature on exchange rate economics.
All starred (*) references below are recommended as essential readings whereas the non-starred ones are suggested either as supplementary readings for a deeper understanding of a particular topic or as background readings on certain aspects of it.
1.1 Old and New Approaches to International Finance
(1) *Gandolfo, sections 1.1 and 1.3
(2) *LN = lecture notes (slides, handouts) posted on this course website
1.2 The Exchange Rate and the Forex Market
(1) *Gandolfo, chapter 2
(2) *LN
1.3. Exchange-Rate Regimes
(1) *Gandolfo, chapter 3
(2) *LN
1.4 International Interest-Rate Parity Conditions: Covered (CIP) and Uncovered (UIP)
(1) *Gandolfo, chapter 4
(2) *Mark, section 1.1
(3) *LN
1.5 The Balance of Payments and Forex Reserves
(1) *Gandolfo, chapter 5
(2) *Mark, section 1.2
(3) *LN
1.6 Central Bank Balance Sheet and Intervention Policies
(1) *Mark, section 1.3
(2) *LN
1.7 Real and Financial Flows in the Open Economy: An Accounting Matrix
(1) *Gandolfo, chapter 6
(2) *LN
2.1 BoP Adjustment Through Exchange-Rate Variations: The Elasticity Approach
2.1.1 Expenditure Switching and Expenditure Reducing Policies
(1) *Gandolfo, section 7.1
(2) *LN
2.1.2 The Marshall-Lerner (Bickerdicke-Robinson or Critical Elasticities) Condition
(1) *Gandolfo, section 7.2
(2) *LN
2.1.3 Foreign Exchange Market Equilibrium and Stability
(1) *Gandolfo, section 7.3
(2) *LN
2.2 BoP Adjustment Through Income Changes: The Multiplier Approach
2.2.1 The Multiplier Theory
(1) *Gandolfo, sections 8.1-8.5
(2) *LN
2.2.2 The Transfer Problem: Keynes (classical theory) vs. Ohlin (multiplier theory)
(1) *Gandolfo, section 8.6
(2) Obstfeld and Rogoff, section 4.5.5.4
(3) Keynes, J. M. (1929), The German Transfer Problem, Economic
Journal 39, 1-7
(4) Ohlin, B. (1929), The Reparation Problem: A Discussion
I. Transfer Difficulties, Real and Imagined, Economic Journal 39, 172-178
(5) Johnson, H. G. (1956), The Transfer Problem and Exchange
Stability, Journal of Political Economy 44, 212-225
(6) *LN
2.3 An Integrated Approach: The Laursen-Metzler (1950) Model
2.3.1 Interaction between Exchange-Rate and Income Changes in the Adjustment Process
(1) *Gandolfo, section 9.1
(2) Laursen, S. and L. A. Metzler (1950), Flexible Exchange Rates
and the Theory of Employment, Review of Economic Studies 32, 281-299
(3) Harberger, A. C. (1950), Currency Depreciation, Income and the
Balance of Trade, Journal of Political Economy 58, 47-60
(4) Stolper, W. F. (1950), The Multiplier, Flexible Exchange Rates
and International Equilibrium, Quarterly Journal of Economics 64, 559-582
(5) *LN
2.3.2 The J-Curve and the S-Curve: currency-contract, pass-through and quantity-adjustment periods
(1) *Gandolfo, sections 9.2 and 9.3
(2) NIESR (1968), The Economic Situation. The Home Economy, National
Institute Economic Review No. 44, 4-17
(3) Magee, S. P. (1973), Currency Contracts, Pass-Through, and
Devaluation, Brookings Papers on Economic Activity No. 1, 303-323
(4) Backus, D. K., P. J. Kehoe and F. E. Kydland (1994), Dynamics
of the Trade Balance and the Terms of Trade: The J-Curve?, American Economic Review 84, 84-103
(5) Senhadji, A. S. (1998), Dynamics of the Trade Balance and the Terms
of Trade in LDCs: The S Curve, Journal o f International Economics 46, 105-131
(6) Mihailov, Alexander (2003a), Is Grassman’s Law Still There? The
Empirical Range of Pass-Through in US, German and Japanese Macrodata, Essex Economics Discussion
Paper No. 567 (October), Department of Economics, University of Essex
(7) *LN
2.3.3 The Alleged Insulating Power of Flexible Exchange Rates
(1) *Gandolfo, section 9.4
(2) *LN
2.4 The Mundell (1960-1964) - Fleming (1962) Model
(1) *Gandolfo, chapters 10 and 11
(2) *Mark, section 8.1
(3) Sarno and Taylor, section 4.1.1
(4) *LN
3.1 The Stock Approach: Purchasing Power Parity (PPP) and the Monetary Model
(1) *Gandolfo, chapter 12
(2) *Mark, chapters 3 and 7
(3) Obstfeld and Rogoff, section 4.1
(4) Sarno and Taylor, chapter 3 and sections 4.1.2, 4.1.3, 4.2.1
(5) *LN
3.2 The Stock-Flow Approach: The Portfolio Balance Model
3.2.1 Asset Stock Adjustment in Partial Equilibrium
(1) *Gandolfo, sections 13.1 and 13.2
(2) *LN
3.2.2 Portfolio and Macroeconomic (General) Equilibrium
(1) *Gandolfo, sections 13.3 and 13.4
(2) Sarno and Taylor, sections 4.1.5 and 4.2.3
(3) *LN
4.1 A Two-Period Small Open Economy Real Model: Partial Equilibrium
(1) *Obstfeld and Rogoff, section 1.1
(2) *LN
4.2 A Two-Period Two-Region World Economy Real Model: General Equilibrium
(1) *Obstfeld and Rogoff, section 1.3
(2) *LN
4.3 A Dynamic Real Model of a Small Open Economy
(1) *Obstfeld and Rogoff, section 2.1
(2) *LN
5.1 A Stochastic Two-Period Real Model of a Small Open Economy
(1) *Obstfeld and Rogoff, section 5.1
(2) *LN
5.2 A Stochastic Two-Period Real Model of a Two-Country Global Economy
(1) *Obstfeld and Rogoff, section 5.2
(2) *LN
5.3 Models with Capital Market Imperfections
5.3.1 Sovereign Risk
(1) Obstfeld and Rogoff, section 6.1
(2) *LN
5.3.2 Risk Sharing with Asymmetric Information
(1) Obstfeld and Rogoff, section 6.3
(2) *LN
5.3.3 Moral Hazard in International Lending
(1) Obstfeld and Rogoff, section 6.4
(2) *LN
6.1 Flexible-Price Models: The Cagan (1956) Monetary Model in a Closed and Open Economy
(1) *Obstfeld and Rogoff, chapter 8
(2) *Mark, chapter 3
(3) Cagan, Phillip (1956), The Monetary Dynamics of Hyperinflation,
in Friedman, Milton (ed.), Studies in the Quantity Theory of Money, Chicago: Chicago
University Press
(4) *LN
6.2 The Rational Expectations Revolution: Muth (1961)
(1) Muth, John (1961), Rational Expectations and the Theory of
Price Movements, Econometrica 29 (July), 315-335
(2) *LN
6.3 Sticky-Price Models under Rational Expectations: The Dornbusch (1976) Overshooting Model
(1) *Obstfeld and Rogoff, chapter 9
(2) Dornbusch, Rudiger (1976), Expectations and Exchange Rate
Dynamics, Journal of Political Economy 84 (6, December), 1161-1176
(3) *LN
7.1 The Lucas (1976) Critique
(1) Lucas, Jr., Robert (1976), Econometric Policy Evaluation:
A Critique, in Brunner, Karl and Meltzer, Allan (eds.), The Phillips Curve and Labour
Markets, Amsterdam: North Holland
(2) *LN
7.2 The Lucas (1982) Dynamic General Equilibrium Model of Exchange Rates
(1) *Mark, chapter 4
(2) Lucas, Jr., Robert (1982), Interest Rates and Currency Prices
in a Two-Country World, Journal of Monetary Economics 10 (3, November), 335-359
(3) *LN
7.3 The Real Business Cycle (RBC) Research Programme in a Closed Economy
(1) *Mark, section 5.1
(2) *Obstfeld and Rogoff, sections 7.4.3.1 - 7.4.3.4
(3) Kydland, Finn and Edward Prescott (1982), Time To Build and
Aggregate Fluctuations, Econometrica 50 (November), 1345-1370
(4) King, Robert, Charles Plosser and Sergio Rebelo (1988a),
Production, Growth and Business Cycles: I. The Basic Neoclassical Model, Journal of
Monetary Economics (March/May), 195-232
(5) King, Robert, Charles Plosser and Sergio Rebelo (1988b),
Production, Growth and Business Cycles: II. New Directions, Journal of Monetary Economics
(March/May), 309-341
(6) *LN
7.4 International (Real) Business Cycle (I(R)BC) Models
(1) *Mark, section 5.2
(2) *Obstfeld and Rogoff, section 7.4.3.5
(3) Backus, David, Patrick Kehoe and Finn Kydland (1992),
International Real Business Cycles, Journal of Political Economy 100 (August), 745-775
(4) Baxter, Marianne (1995), International Trade and Business
Cycles, National Bureau of Economic Research Working Paper No. 5025 (February)
(5) Baxter, Marianne and Mario Crucini (1995), Business Cycles
and the Asset Structure of Foreign Trade, International Economic Review 36 (4, November),
821-854
(6) *LN
8.1 The New Neo-Classical Synthesis (NNS) in a Closed Economy: Goodfriend and King (1997)
(1) *Sarno and Taylor, chapter 5
(2) Goodfriend, Marvin and Robert King (1997), The New
Neoclassical Synthesis and the Role of Monetary Policy, NBER Macroeconomics Annual
1997, 231-395
(3) Lane, Philip (2001), The New Open Economy Macroeconomics:
A Survey, Journal of International Economics 54 (2, August), 235-266
(4) Canzoneri, Matthew, Robert Cumby and Behzad Diba (2002),
The Need for International Policy Coordination: What’s Old, What’s New, What’s Yet to Come?,
National Bureau of Economic Research Working Paper No. 8765 (February)
(5) Vanhoose, David (2004), The New-Open Economy Macroeconomics:
A Critical Appraisal, Open Economies Review 15, 193-215
(6) *LN
8.2 New Open-Economy Macroeconomics (NOEM): The Obstfeld-Rogoff (1995) Redux Model
(1) *Obstfeld and Rogoff, chapter 10
(2) *Mark, section 9.1
(3) Walsh, Carl (1998), Monetary Theory and Policy, MIT Press, chapter 6
(4) *LN
8.3 The Betts-Devereux (1996, 2000) Redux Extensions: Pricing to Market (PTM)
(1) *Mark, section 9.2
(2) Betts, Caroline and Michael B. Devereux (1996),
The Exchange Rate in a Model of Pricing to Market, European Economic Review 40
(3-5, April), 1007-1021
(3) Betts, Caroline and Michael B. Devereux (2000),
Exchange Rate Dynamics in a Model of Pricing to Market, Journal of International
Economics 50 (1, February), 215-244
(4) *LN
8.4 The Corsetti-Pesenti (1997, 2001) Redux Extensions: Low (Unit) Cross-Country Substitutability
(1) *LN
(2) Corsetti, Giancarlo and Paolo Pesenti (1997),
Welfare and Macroeconomic Independence, National Bureau of Economic Research
Working Paper No. 6307 (October)
(3) Corsetti, Giancarlo and Paolo Pesenti (2001a),
Welfare and Macroeconomic Independence, Quarterly Journal of Economics 116
(2, May), 421-445
(4) Corsetti, Giancarlo and Paolo Pesenti (2001b),
International Dimensions of Optimal Monetary Policy, National Bureau of Economic
Research Working Paper No. 8230 (April)
(5) Corsetti, Giancarlo and Paolo Pesenti (2002),
International Dimensions of Optimal Monetary Policy, Centre for Economic Policy
Research Discussion Paper No. 3349 (April)
8.5 The Devereux-Engel (1998, 1999, 2000) Redux Extensions: Exchange Rate Regimes
(1) *LN
(2) Devereux, Michael B. and Charles Engel (1998), Fixed versus
Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate
Regime, National Bureau of Economic Research Working Paper No. 6867 (December)
(3) Devereux, Michael B. and Charles Engel (1999), The Optimal
Choice of Exchange-Rate Regime: Price Setting Rules and Internationalized Production,
National Bureau of Economic Research Working Paper No. 6992 (March)
(4) Devereux, Michael B. and Charles Engel (2000), Monetary Policy
in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility, National Bureau
of Economic Research Working Paper No. 7665 (April)
(5) Devereux, Michael B. (2000), Monetary Policy Rules and
Exchange Rate Flexibility in a Simple Dynamic General Equilibrium Model, mimeo (revised
version of October)
(6) Engel, Charles (2000), Optimal Exchange Rate Policy: The
Influence of Price Setting and Asset Markets, National Bureau of Economic Research
Working Paper No. 7889 (September)
9.1 Obstfeld and Rogoff (1998, 2000, 2001) Directions for NOEM Research: Risk and Space
(1) *LN
(2) Obstfeld, Maurice and Kenneth Rogoff (1998), Risk and Exchange
Rates, National Bureau of Economic Research Working Paper No. 6694 (August)
(3) Obstfeld, Maurice and Kenneth Rogoff (2000), New Directions for
Stochastic Open Economy Models, Journal of International Economics 50 (1, February), 117-153
(4) Obstfeld, Maurice, and Kenneth Rogoff (2001), The Six Major
Puzzles in International Macroeconomics: Is There a Common Cause?, NBER Macroeconomics Annual
2000, Volume 15, 341-390
9.2 Early Stochastic NOEM Contributions: Bacchetta and van Wincoop (1998, 2000)
(1) *LN
(2) Bacchetta, Philippe and Eric van Wincoop (1998), Does Exchange
Rate Stability Increase Trade and Capital Flows?, National Bureau of Economic Research Working
Paper No. 6704 (August)
(3) Bacchetta, Philippe and Eric van Wincoop (2000), Does Exchange
Rate Stability Increase Trade and Welfare?, American Economic Review 90 (5, December), 1093-1109
(4) Mihailov, Alexander (2003b), Effects of the Exchange-Rate Regime on
Trade under Monetary Uncertainty: The Role of Price Setting, Essex Economics Discussion Paper
No. 566 (October), Department of Economics, University of Essex
9.3 A Single-Period NOEM Model with Trade Costs and Inelastic Imports: Mihailov (2003c)
(1) *LN
(2) Mihailov, Alexander (2003c), When and How Much Does a Peg
Increase Trade? The Role of Trade Costs and Import Demand Elasticity under Monetary
Uncertainty, Essex Economics Discussion Paper No. 567 (October), Department of Economics,
University of Essex
9.4 A Multi-Period NOEM Model with Asset Structure and Intermediate Goods: Singh (2004)
(1) *LN
(2) Singh, Rajesh (2004), Trade and Welfare Under Alternative
Exchange Rate Regimes, Iowa State University Working Paper No. 04008 (February)
10.1 Forex Market Efficiency
(1) *Mark, chapter 6
(2) *Sarno and Taylor, chapter 2
(3) *LN
10.2 Official Intervention in Forex Markets
(1) *Sarno and Taylor, chapter 7
(2) *LN
10.3 Forex Market Microstructure
(1) *Sarno and Taylor, chapter 9
(2) *LN
10.4 The Jeanne and Rose (2002) Model with Noise Traders
(1) *LN
(2) De Long, J. Bradford, Andrei Shleifer, Lawrence Summers
and Robert Waldmann (1990), Noise Trade Risk in Financial Markets, Journal of Political
Economy 98, 703-738
(3) Jeanne, Olivier and Andrew Rose (2002), Noise Trading and
Exchange Rate Regimes, Quarterly Journal of Economics 117 (May), 537-569
11.1 First-Generation Models
(1) *Mark, section 11.1
(2) *Sarno and Taylor, section 8.1
(3) Gandolfo, section 16.3.1
(4) *LN
11.2 Second-Generation Models
(1) *Mark, section 11.2
(2) *Sarno and Taylor, section 8.2
(3) Gandolfo, section 16.3.2
(4) *LN
11.3 Third-Generation Models
(1) *Gandolfo, section 16.3.3
(2) *Sarno and Taylor, section 8.3
(3) *LN
12.1 The Theory of Optimal Currency Areas (OCAs)
(1) *Gandolfo, chapter 20
(2) *LN
12.2 Target-Zone Models and Currency Unions
(1) *Sarno and Taylor, chapter 10
(2) *LN
12.3 The Experience with the European Monetary System/Union (EMS/EMU)
(1) *Gandolfo, chapter 21
(2) *LN