API 102I ECONOMIC ANALYSIS OF PUBLIC POLICY: INTERNATIONAL ECONOMICS Spring 2018

Transcription

1 API 102I ECONOMIC ANALYSIS OF PUBLIC POLICY: INTERNATIONAL ECONOMICS Spring 2018 Lecture: Tu/Th 10:15-11:30am, Rubinstein 306 Review session: Friday 10:15-11:30am Professor Jason Furman - Jason_Furman@hks.harvard.edu Office: Ofer 407 Office Hours: Thursdays 2-4pm Faculty Assistant: Catherine Kearns - Catherine_Kearns@hks.harvard.edu Professor Robert Lawrence - Robert_Lawrence@hks.harvard.edu Office: Littauer 316 Office Hours: Wednesdays 1:30-3:30pm Faculty Assistant: Jean Dombrowski - Jean_Dombrowski@hks.harvard.edu Teaching Team: Teaching Fellow: Mitchell Watt - Mitchell_Watt@hks18.harvard.edu Course Assistant: TBD Course Assistant: TBD COURSE DESCRIPTION This course is designed for students interested in an introduction to international economics, including topics such as the balance of payments, exchange rates, monetary and fiscal policy, and trade policy. The course will help students to understand the implications of monetary policy for exchange rates and trade. We will also discuss some aspects of the international monetary system and multilateral institutions. The course stresses policy topics that are topical (but often timeless). It is intended to provide an introduction to select economic and policy issues for advanced economies, and emerging and developing countries. PREREQUISITES A knowledge of economics at the API-101 level is assumed. Students who have taken ITF-610 or 620 and have also taken API-121 or ITF-220 should probably not take this API-102 section. GRADING Problem Sets: 20% Midterm Exam 50% Final Exam 30%

2 Exams are closed book with no notes allowed. You are expected to be present on that day. Problem sets: (1) Must be handed in at the beginning of class (in the classroom) at the beginning of class every Tuesday. Late problem sets will not be evaluated. (2) Will be corrected by the course assistants but not graded in detail. (3) You may work on the problem sets in small groups. However, answers must be written up individually, in your own words. Sharing of electronic documents in the preparation of your answers is not permitted. Please put the names of your study group member(s) on your problem set. Assignments containing duplicate answers will not receive credit and will result in disciplinary review. CLASS PARTICIPATION AND ENGAGEMENT We strongly believe that student participation can substantially enrich the learning experience for both the students and the instructor. In this spirit, class participation is encouraged. Effective class participation requires that you read the assigned readings before coming to class. You are encouraged to ask questions, to share relevant insights you have from previous experiences, and to treat your classmates participation with courtesy. We only ask that questions and comments be brief and related to the topic at hand. ACADEMIC INTEGRITY AND OTHER EXPECTATIONS You are expected to abide by the University policies on academic honesty and integrity as given in the HKS Academic Code. Violations of these policies will not be tolerated and are subject to severe sanctions up to and including expulsion from the University. That includes using citations, including any quotes in quotation marks, and not re-using any work from other courses without prior permission of the instructor. Laptops and other electronic devices cannot be used in class. If you would like an exception you can talk to the instructor about your reasons and possible accommodations. Requests for reconsideration of grades on exams are not encouraged, and will be accepted only in writing, with a clear statement of what has been mis-graded, and within one week of receiving your graded exam. Please submit your full exam so grading on all questions can be reconsidered. READINGS The required textbook is Paul R. Krugman, Maurice Obstfeld, and Marc Melitz (henceforth, KOM) International Economics: Theory and Policy, Eleventh Edition (available for rent at the COOP). Please note that any earlier editions of this book are perfectly acceptable. Additionally, slides used in lectures, lecture notes, the syllabus, and selected readings will be posted on the Course Website. 2

3 COURSE SCHEDULE Readings are tentative and subject to change. Lecture slides will be provided. Approximate page numbers for the 10 th edition of KOM are indicated in square brackets. Course Overview and Introduction to International Macroeconomics January 23 We describe the road map for the class, provide examples of the issues will handle throughout the semester and provide an overview of the frameworks used for macroeconomics. What Determines Exchange Rates in the Short Run January 25 Required Reading: KOM Chapter 14 and Chapter 15, pp [pp ] We learn about exchange rates and how they are affected by changes in interest rates and monetary policy in the short run. What Determines Exchange Rates and Inflation in the Long Run January 30 Required Reading: KOM Chapter 15, pp and Chapter 16. [pp ] We study the longer-run fundamental forces underlying exchange rates and inflation, including linking them to monetary policy. National Income Accounting and the Balance of Payments 1 Required Reading: KOM Chapter 13. [pp ] We introduce the key building blocks of an open economy. Output and the Exchange Rate in the Short Run 6 8 Required Reading: KOM Chapter 17, pp [pp ] We study the general theory of the determination of output and the exchange rate in the short run, including how they are affected by monetary and fiscal policy. Monetary Policy Required Reading: KOM Chapter 17, pp [ ] The Economist QE, or not QE? The Economist. July 14. 3

4 Becker, Gary S Why I Do Not Like QE2. The Becker-Posner Blog. November 14. Bernanke, Ben S How Big a Problem is the Zero Lower Bound on Interest Rates? Ben Bernanke s Blog. April 12. Bernanke, Ben S The Zero Lower Bound on Interest Rates: How Should the Fed Respond? Ben Bernanke s Blog. April 13. Summers, Lawrence The Age of Secular Stagnation: What It Is and What to Do About It. Foreign Affairs 95(2): 2-9. Krugman, Paul Monetary Policy in a Liquidity Trap. New York Times Blog. April 11. We discuss monetary policy in more detail, including emerging issues around monetary policy in a low interest rate world (sometimes called secular stagnation ). Fiscal Policy Required Reading: KOM Chapter 17, pp [pp ] The Economist Where Does the Buck Stop? The Economist. August 11. The Economist Sovereign Doubts. The Economist. September Furman, Jason The New View of Fiscal Policy and Its Applications. Speech at Global Implications of Europe s Redesign Conference. New York, NY. October 5. Wigglesworth, Robin Public Finances: A World of Debt. Financial Times. January 6. Celasun, Oya, et al Fiscal Policy in Latin America: Lessons and Legacies of the Global Financial Crisis. Staff Discussion Note 15/06. Washington, DC: International Monetary Fund. pp Optional read rest of paper. Optional Reading: Auerbach, Alan J Fiscal Policy. for the Rethinking Macroeconomics conference at the Peterson Institute for International Economics. 4

5 Elmendorf, Douglas W., and Louise M. Sheiner Federal Budget Policy with an Aging Population and Persistently Low Interest Rates. Journal of Economic Perspectives 31(3): We discuss fiscal policy in more detail, including more on discretionary fiscal stimulus, automatic stabilizers, the economics of deficits and debt, and changing views of fiscal policy. 15 Guest Lecture: Maurice Obstfeld (Economic Counsellor and Research Department Director, International Monetary Fund) Required Reading: Obstfeld, Maurice, and Alan M. Taylor International Monetary Relations: Taking Finance Seriously. Journal of Economic Perspectives 31(3): Economic Policy Under Fixed Exchange Rates 20 Required Reading: KOM Chapter 18, pp [pp ] The Economist The Mundell-Fleming Trilemma: Two Out of Three Ain t Bad. The Economist. August 27. We study how exchange rates can be fixed and how fiscal, monetary and other policy work in countries with fixed exchange rates. Alternative Exchange Rate Regimes Required Reading: KOM Chapter 18, pp ; Chapter 19, pp ; and Chapter 21, pp [pp ; ; ] Cavallo, Michele To Float or Not to Float? Exchange Rate Regimes and Shocks. FRBSF Economic Letter. January. San Francisco: Federal Reserve Bank of San Francisco. 22 Bergsten, C. Fred Alternative Exchange Rate Systems and Reform of the International Financial Architecture. Testimony before the U.S. House Committee on Banking and Financial Services. May 21. Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor Reserve Accumulation and Financial Stability. VoxEU. October 11. We look at the real-world alternatives to the flexible and fixed exchange regimes and discuss their pros and cons. We will also study optimal currency areas. 5

6 Current Account Imbalances and Capital Inflows Required Reading: KOM Chapter 17, pp and Chapter 19, pp and [pp ; ; ] Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart Inflows of Capital to Developing Countries in the 1990s. Journal of Economic Perspectives 10(2): Blanchard, Olivier, and Gian Maria Milesi-Ferretti (Why) Should Current Account Balances Be Reduced? IMF Economic Review 60(1): The Economist The Other Deficit. The Economist. October 15. Furman, Jason Buying More Chevy s Won t Fix Germany s Imbalance. Wall Street Journal. June 7. Optional Reading: Bernanke, Ben S. The Global Saving Glut and the U.S. Current Account Deficit. Remarks at the Sandridge Lecture, Virginia Society of Economists. Richmond, VA. 10. We discuss the sources and consequences of current account imbalances including both large surpluses, large deficits, and the role of capital flows. Global Macroeconomic Interdependence and Coordination Required Reading: KOM Chapter 19, pp [pp ] The Economist What a Carry On. The Economist. November Fischer, Stanley U.S. Monetary Policy from an International Perspective. Speech at the 20th Annual Conference of the Central Bank of Chile. Santiago, Chile. November 11. Frankel, Jeffrey International Macroeconomic Policy Coordination. VoxEU. December 9. Smith, Noah Trump Isn t All Wrong About Currency Manipulation. Bloomberg View. 6. Slaughter, Matthew J The Myths of China s Currency Manipulation. Wall Street Journal. January 8. 6

7 Optional Reading: Frankel, Jeffrey International Coordination. NBER Working Paper No Cambridge, MA: National Bureau of Economic Research. We look at how economic developments and policy decisions in one country can spillover and affect other countries and the role and limits of global macroeconomic coordination in addressing these issues. Summation and Rethinking International Macroeconomics 6 Required Reading: Gopinath, Gita Rethinking Macroeconomic Policy: International Economy Issues for the Rethinking Macroeconomics conference at the Peterson Institute for International Economics. Optional Reading: Blanchard, Olivier, and Lawrence Summers Rethinking Stabilization Policy. Back to the Future. for the Rethinking Macroeconomics conference at the Peterson Institute for International Economics. This class will summarize the international macroeconomic portion of the course and discuss some new thinking on these issues Midterm Exam Financial Crises (Guest Lecture by Carmen Reinhart) Required Reading: TBD From Macro to Micro Trade and Jobs Required Reading: Mankiw, N. Gregory. Macroeconomics Chapter 6 The Open Economy, The Effects of Trade Policies in Section Irwin, Neil The trade deficit isn t a scorecard, and cutting it won t make America great again. New York Times. 27. Bernstein, Jared Trade deficits are not scorecards, but under certain circumstances they are far from benign. Huffington Post. 28. Navarro, Peter Why the White House Worries About Trade Deficits Wall Street Journal. 6. We study the links between the trade balance, trade policy and employment. 7

8 Comparative Advantage and the Gains from Trade Required Reading: KOM Chapter 3. [24-50] 27 Lawrence Notes We study the gains from trade that come from exploiting comparative advantage. We also briefly discuss dynamic gains and gains when countries are similar. Winners and Losers from Trade Required Reading: Lawrence Notes 29 Alt, James E., and Michael Gilligan The Political Economy of Trading States: Factor Specificity, Collective Action Problems and Domestic Political Institutions reprinted in Jeffery A. Frieden and David A. Lake (eds) International Political Economy: Perspectives on Global Power and Wealth, (Thomson Wadsworth), pp Optional Reading: KOM Chapter 5, pp [pp ] We develop theories that help us decide who gains and who might lose from trade. Trade Policies, Tariffs and Effective Protection April 3 Required Reading: KOM Chapter 9, pp [pp ] Lawrence Notes We explore how tariffs affect welfare. 8

9 Trade Policies, Quotas April 5 Required Reading: KOM Chapter 9, pp [pp ] Lawrence Notes We consider the pros and cons of using tariffs or quotas. Market Failure and Trade Policy in an Open Economy Required Reading: KOM Chapter 10, pp [pp ] Lawrence Notes April 10 Corden, W Max The Theory of Domestic Divergences pp (Sections 2.2, 2.3 and 2.4) and pp (Section 2.8) in W Max Corden. Trade Policy and Economic Welfare. New York: Oxford University Press. Optional Reading: Cooper, Richard N Economic Assumptions of the Case for Liberal Trade. Chapter 1 in C. Fred Bergsten, ed., Toward a New World Trade Policy. Lexington Books, pp Rodrik, Dani Why Doesn t Everyone Get the Case for Free Trade? Chapter 3 in Dani Rodrik, The Globalization Paradox. We now reconsider the arguments for trade when there is market failure. Infant Industries and Industrial Policies Required Reading: KOM Chapter 7, pp and Chapter 11, pp [pp ; ] April 12 Rodrik, Dani Industrial Policy for the Twenty-First Century paper for Unido Harvard Mimeo pp Optional read rest of paper. Lawrence, Robert Z How Good Politics Results in Bad Policy: The Case of BioFuels Mandates Belfer Center Discussion Paper pp. 1-5, Optional read rest of paper. We discuss policies to ensure that trade could be beneficial when there is market failure but also point to political and informational problems of applying them. 9