KC3002 International Finance /International Macroeconomics

Transcription

1 KC3002 International Finance /International Macroeconomics Spring 2016 Lecture 1 General Course Discussion Hideyuki IWAMURA Faculty of International Studies

2 Hideyuki IWAMURA Ph.D in International Studies, The University of Tokyo, 2006 Research: Political Economy of Monetary Unions Courses: International Finance, Introduction to Economics, Statistics, etc. Website: (Old) *After class, handouts are posted on this website. 3 Contact Information Office: Room #8423, Building #8 Office Hour: 12:30 13:20 on Thursday Any other time by a prior appointment iwamura@k.meijigakuin.ac.jp 4

3 International macroeconomics "International macroeconomics" is devoted to the study of large-scale economic interactions among independent economies. It is international because a deeper exploration of the interconnections among nations is essential to understanding how the global economy works. It is macroeconomics because it focuses on key economywide variables, such as exchange rates, prices, interest rates, income, national external wealth, and the current account. 5 Main topics to be discussed 1.Exchange rates determination 2.Financial globalization and its impact 3.Government policy and institutions 6

4 Exchange rates 7 Exchange rates Everyday, market exchange rates are frequently reported in TV news programs. National leaders often have heated debates on exchange rates among their currencies at international conferences such as Summits. Why are we so concerned about exchange rates? Partly because exchange rates change frequently and sharply. 8

5 Japan-U.S. exchange rate /$ Jan-15 5-Feb-15 5-Mar-15 5-Apr-15 5-May-15 5-Jun-15 5-Jul-15 5-Aug-15 5-Sep-15 5-Oct-15 5-Nov-15 5-Dec-15 5-Jan-16 5-Feb-16 5-Mar-16 Data: Bank of Japan website U.S.-Eurozone exchange rate $/ 1 05-Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-16 US dollar/euro Data: Bank of Japan website 10

6 Denmark-Eurozone exchange rate Dkk/ /1/2 2015/2/2 2015/3/2 2015/4/2 2015/5/2 2015/6/2 2015/7/2 2015/8/2 2015/9/2 2015/10/2 2015/11/2 2015/12/2 2016/1/2 2016/2/2 2016/3/2 Data: Denmarks Nationalbank website Yuan/$ China-U.S. exchange rate Data: Federal Reserve Bank of St. Louis website 12

7 Japan-U.S. rate: percent change 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% 6-Jan-15 6-Feb-15 6-Mar-15 6-Apr-15 6-May-15 6-Jun-15 6-Jul-15 6-Aug-15 6-Sep-15 6-Oct-15 6-Nov-15 6-Dec-15 6-Jan-16 6-Feb-16 6-Mar U.S.-Eurozone rate: percent change 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% 14

8 Denmark-Eurozone rate: percent change 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% 2015/1/5 2015/2/5 2015/3/5 2015/4/5 2015/5/5 2015/6/5 2015/7/5 2015/8/5 2015/9/5 2015/10/5 2015/11/5 2015/12/5 2016/1/5 2016/2/5 2016/3/5 15 China-U.S. rate: percent change 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%

9 Why do some exchange rates fluctuate frequently and sharply, while some exchange rates are stable and almost fixed? What determines exchange rates and how? 17 Exchange rates and real economy Changes in exchange rates affect an economy in two ways. 1. Changes in exchange rates causes a change in the international relative prices of goods produced in different countries. One country s goods become more or less expensive relative to another country s, compared in the same currency unit, even if the local currency prices are fixed. 2. Changes in exchange rates causes a change in the international relative prices of assets issued in different currencies. Assets in one currency become more or less expensive relative to assets in another currency, compared in the same currency, even if their local currency prices are fixed. 18

10 Financial globalization Globalization of finance is a defining characteristic of modern world economy. The financial system channels money or "funds" from a person who spends less than he earns, to a person who is in short of money by spending more than he earns. A few years ago, most of this financial activity was limited within national borders. Today, much of this activity spills across international borders. Countries are much more open from a financial standpoint

11 How could financial globalization make countries better off? What are the benefits from globalization of finance? What are the potential risks? 21 Government and Institutions Government actions or policies influence economic outcomes in many ways. Government s choice of policy instruments is restricted and strongly affected by institutional arrangement such as exchange rate regimes. The choice of exchange rate regimes can have substantial effects on our economic welfare. 22

12 Fixed and floating regimes There are two broad categories of exchange rate arrangements -- fixed/pegged exchange rate regimes and floating/flexible exchange rate regimes. Under a fixed exchange rate regime, government is expected to intervene actively in the FX market so that it can maintain the exchange rate at an officially announced level. Under a floating regime, government is not expected to intervene in the market, and leaves it to the interaction between the demand and supply of the private participants. 23 Fixed and floating regimes Under a fixed regime, government must adjust its policy so that the exchange rate would stay at an officially announced level. The policy alternatives are limited to those consistent with that targeted level of exchange rate. Government has to give up the freedom to choose policy instruments. Under a floating regime, government does not have to care about its exchange rate, and has the freedom to choose policy instruments. 24

13 Exchange rate regimes What are the benefits of fixed regimes, to be weighed against the cost of loss in policy autonomy? 25 Common currency Some countries, instead of fixing their exchange rates, abolish their own national currencies and jointly adopt a common currency. Creating a common currency is the ultimate form of fixed regimes, because it completely eliminates exchange rates. Why do some countries keep their national currencies and fix their exchange rate? Why insist on having their own currencies? Why do some countries directly eliminate exchange rate fluctuations by creating a common currency? 26

14 Lecture schedule(tentative) 1 April 8 General Course Discussion 2 April 15 Exchange Rates: Equilibrium in the FX Market 3 April 22 Interest Rates: Money, Bond, and Interest Rates 4 May 6 Interest Rates: Money, Interest Rates, and Exchange Rates 5 May 13 National Income Accounting 6 May 20 Balance of Payments 7 May 27 Output: Equilibrium in the Goods Market 8 June 3 Midterm and Review 27 Lecture schedule(tentative) 9 June 10 Open Economy IS-LM Model(1): Describing Simultaneous Determination of Exchange Rates, Interest rates, and Output 10 June 17 Open Economy IS-LM Model(2): Theory of Short-run Fluctuations 11 June 24 Fixed Exchange Rates 12 July 1 Euro: Theory of Optimum Currency Areas 13 July 8 Purchasing Power Parity: Theory of Long-run Fluctuations of Exchange Rates 14 July 15 Review 15 July 22 Final 28

15 Grading Policy Grades will be based on two in-class exams and several in-class quizzes. Midterm (June 3) Final (July 22) Quizzes 10% 30%, multiple-choice questions, 2-3 essay questions 60%, multiple-choice questions, 2-3 essay questions, covers all the materials in the course No make-up tests unless there are compelling medical reasons supported by a doctor s note. No make-up for quizzes. 29 Prerequisite A good understanding of introductory macroeconomics courses (for example, KC2103 Introduction to Economics B) would be essential. Basic algebra skills are assumed. No differentiation or matrix algebra is required. 30

16 References No particular textbook is used. Handouts are distributed. [1] Robert Feenstra and Alan Taylor, International Macroconomics, 3 rd Edition, Worth Publishers, Lectures are mainly based on Part 5 through Part 8. [2] Frederic Mishkin, The Economics of Money, Banking, and Financial Institutions, 10 th Edition, Pearson, Chapters 4 and 5 on interest rates will be covered. 31 [3] References(cont.) Paul Krugman, Maurice Obstfeld, and Marc Melitz, International Economics: Theory and Policy, 10 th Edition, Pearson, Alternative to Feenstra and Taylor(2014). [4] N. Gregory Mankiw, Macroconomics, 7 th Edition, Worth Publishers,