Economics 342: International Macroeconomics. Kimberly A. Clausing Fall 2012 Vollum 230

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1 Economics 342: International Macroeconomics Kimberly A. Clausing Fall 2012 Vollum 230 Perhaps more than ever before, an international perspective is required to address the fundamental questions of macroeconomics. What determines the level of economic activity in an economy? What determines the pace of economic growth? What are the effects of monetary and fiscal policy? An international perspective not only improves understanding of these familiar questions, but it also allows one to consider important new questions. For instance, why do some countries run trade deficits or surpluses? Should such imbalances concern policy makers? Why do some countries encounter financial crises? What is the proper response to these crises? Further, countries differ a great deal in terms of their exposure to the international economy, their level of economic development, their size, and their institutions. These differences are important for understanding how their economies function as well as the likely effects of macroeconomic policies. In this course, we will build a framework that allows us to address the many interesting questions of international macroeconomics. In this context, several important topics will be discussed, including the following. What role do monetary and fiscal policy have in open economies? Is there a need for new international financial institutions? What are the merits of European Monetary Union? What are the tradeoffs between fixed and flexible exchange rates? What can account for financial crises? Reading: You should purchase Krugman and Obstfeld, 9th edition. Substantial additional material will come from other sources on reserve. When possible, materials are on e-reserve, but some selections of books are only available as hard copies. Office Hours: I will hold regular office hours on Tuesdays and Thursdays from 10 until 11:30am. You can also reach me by to schedule other times. Requirements: Evaluation will be based on four problem sets, a midterm exam, a final exam, a group presentation, and participation in discussion. Mark the following days in your calendar. Midterm Exam October 12 Problem Sets Due September 17, October 5, November 5 and 21 Presentations November 7, 16 and 28 Final Exam to be set by Registrar s office, during December (Warning: Do not make early travel arrangements until set.)

2 Readings marked with an * are optional. Introduction (August 27) Course Outline and Readings Rodrik, Dani. How Far will International Economic Integration Go? Journal of Economic Perspectives. 14 (1). Winter * Fischer, Stanley. Globalization and Its Challenges. American Economic Review. May National Income Accounting and the Balance of Payments (August 29 and 31) Krugman and Obstfeld, c.13 Intertemporal Trade and the Current Account (September 5 and 7) Krugman and Obstfeld, p and p Sachs and Larrain. Macroeconomics in the Global Economy. Chapter 21, "Tradable and Nontradeable Goods." Current Account Deficits (September 10) Obstfeld, Maurice Does the Current Account Still Matter? American Economic Review. 102(3) * Cooper, Richard N Global Imbalances: Globalization, Demography, and Sustainability. Journal of Economic Perspectives. 22(3). Summer * Feldstein, Martin Resolving the Global Imbalance: The Dollar and the U.S. Savings Rate.. Journal of Economic Perspectives. 22(3). Summer Exchange Rates and Money (September 12, 14, and 17) Krugman and Obstfeld, c. 14, 15 Rogoff, Kenneth, "Perspectives on Exchange Rate Volatility," in International Capital Flows, Feldstein, Martin, ed.1999, * Froot, Kenneth and Thaler, Richard. "Anomalies: Foreign Exchange". Journal of Economic Perspectives. Summer Problem Set 1 due September 17

3 Prices and Exchange Rates in the Long Run (September 19, 21, and 24) Krugman and Obstfeld, c.16 "Currency Comparisons, To Go." The Economist. 28 July Burgernomics to Go. The Economist. 9 June Allessandria, George and Joseph Kaboski Why are Goods So Cheap In Some Countries? Federal Reserve Bank of Philadelphia Business Review. 2 nd Quarter Taylor, Alan M. and Mark P. Taylor The Purchasing Power Parity Debate. Journal of Economic Perspectives. 18(4) Output and Exchange Rates in the Short Run (September 26 and 28, October 1, 3, and 5) Krugman and Obstfeld, c.17 "Of Congress, cuts, and currencies." The Economist. 21 October p.82. * Krugman, Paul. "Exchange Rate Policy: the J-curve, the Fire Sale, the Hard Landing." American Economic Review. May 1989, Problem Set 2 due October 5 Fixed Exchange Rates and Foreign Exchange Intervention (October 8 and 10) Krugman and Obstfeld, c.18 Midterm Exam: October 12 Currency and Financial Crises: Take 1 (October 22) Summers, Lawrence H "International Financial Crises: Causes, Prevention, and Cures. American Economic Review Mishkin, Frederic S Global Financial Instability: Framework, Events, Issues Journal of Economic Perspectives. Volume 13 (4) Krugman, Paul. What Happened to Asia? January * Roubini, Nouriel Bailouts or Bailins: Responding to Financial Crises in Emerging Markets. Washington: Institute for International Economcs. Chapter 2. Currency and Financial Crises: Take 2 (October 24) Romer, Christina. Lessons from the Great Depression for Economic Recovery in March 2009.

4 Gorton, Gary B. and Andrew Metrick. Getting Up to Speed on the Financial Crisis : A One-Weekend Reader s Guide. NBER Working Paper no January * Krugman, Paul. Crises: Nobel Lecture to the American Economic Association. January The International Monetary System in History (October 26 and 29) Krugman and Obstfeld, c.19 Hume, David. "On the Balance of Trade." in Richard Cooper, ed. International Finance. Baltimore: Penguin Books, J.M. Keynes. "The Economic Consequences of Mr. Churchill," in Essays in Persuasion. New York: W.W. Norton & Co Temin, Peter. "Lecture 1." Lessons from the Great Depression. Cambridge: MIT Press, * Cooper, Richard. "The Gold Standard: Historical Facts and Future Prospects." Brookings Papers on Economic Activity. 1982:1, Fixed v. Flexible (October 31, November 2 and 5) Problem Set 3 due November 5 The Case for Flexible Exchange Rates Krugman, Paul. Exchange Rate Instability chapter 1: "The Case for Exchange Rate Flexibility." * Friedman, Milton. "The Case for Flexible Exchange Rates." in Essays in Positive Economics. (1953). The Case for Fixed Exchange Rates Reinhart, Carmen. The Mirage of Floating Exchange Rates. American Economic Review. 90 (2). May * Williamson, John. "On the System in Bretton Woods". American Economic Review. May Currency Boards and Dollarization Dornbusch, Rudi. Fewer Monies, Better Monies. American Economic Review. 91(2). May

5 Rogoff, Kenneth. Why Not a Global Currency? American Economic Review. 91(2). May The Case for Pragmatism Calvo, Guillermo A. and Frederic S. Mishkin The Mirage of Exchange Rate Regimes for Emerging Market Countries. Journal of Economic Perspectives. 17(4). Fall Frankel and Xie Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes. American Economic Review. 100(2) * Fischer, Stanley. Exchange Rate Regimes: Is the Bipolar View Correct? Journal of Economic Perspectives. 15(2). Spring Conference 1: Should China Peg Its Currency? (November 7) Roubini, Nouriel. Why China Should Abandon Its Dollar Peg. International Finance. 10:1, 2007: pp McKinnon, Ronald. Why China Should Keep Its Dollar Peg. International Finance. 10:1, 2007: pp European Monetary Union (November 9, 12, and 14) Krugman and Obstfeld, c.20 Main EU web site: And within, the Euro web site: and European Central Bank web site: Rose, Andrew, and Eric van Wincoop. National Money as a Barrier to International Trade: The Real Case for Currency Union. American Economic Review. 91(2). May Lane, Philip The Real Effects of European Monetary Union. Journal of Economic Perspectives. 20(4) Corsetti, Giancarlo, ed. Austerity: Too Much of a Good Thing? Read chapters by DeLong, Panizza and Presbitero, and final chapter by Corsetti. Browse remainder. * Dominguez, Kathryn The European Central Bank, the Euro, and Global Financial Markets. Journal of Economic Perspectives. 20(4) * Berka, Devereux, and Engel Real Exchange Rate Adjustment in and out of the Eurozone. American Economic Review. 102(3)

6 Conference 2: Should Greece Exit (or have exited)? (November 16) Browse materials within: and use search field to find recent columns on Greece. Roubini, Nouriel. Early Retirement for the Eurozone? Project Syndicate. 15 August Is Grexit Good for the Euro? Economist. 16 June See various blog posts especially Krugman s recent posts on Greece. Weisbrot and Montecino. More Pain, No Gain for Greece: Is the Euro Worth the Costs of Pro- Cyclical Fiscal Policy and Internal Devaluation? CEPR. February Financial Globalization (November 19) Krugman and Obstfeld, c.21 Proposals for International Reform (November 21 and 26) Stiglitz, Joseph. The Insider: What I Learned at the World Economic Crisis. The New Republic. 17 April And Replies by Rudi Dornbusch, Alice Amsden, and others. The New Republic. Letters. 29 May Morgan, John Reforming the IMF. Economists Voice. October. Rogoff, Kenneth International Institutions for Reducing Global Financial Instability. Journal of Economic Perspectives. Volume 13 (4) * Chamley and Pinto Why Official Bailouts Tend Not to Work: An Example Motivated by Greece The Economists Voice. February * Acharya, Viral V. et al. Real Time Solutions for Financial Reform: An NYU Stern Working Group on Financial Reform. December Problem Set 4 due November 21 Conference 3: Is Capital Too Mobile? (November 28) DeLong, J.B Should We Support Untrammelled International Capital Mobility? Or are Capital Controls Less Evil than We Believed? Economists Voice. 1(1). 1-7.

7 Williamson, John The Case for Capital Mobility. Chapter 3 of Curbing the Boom-Bust Cycle: Stabilizing Capital Flows to Emerging Markets. Washington: Institute for International Economics Press. Stiglitz, Joseph Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable. American Economic Review. 100(2) Jeanne, Olivier. Capital Flow Management. American Economic Review. May (3) * Tobin, James. A Proposal of International Monetary Reform. Eastern Economic Journal. July/October (3-4) Developing Countries and Debt (November 30, December 3 and 5) Krugman and Obstfeld, c.22 Arslanalp, S. and P. B. Henry Policy Watch: Debt Relief. Journal of Economic Perspectives. 20(1) A Victory by Default? Argentina s Debt Restructuring Economist. 5 March Tucking Into Good Times; Argentina Economist. 23 December Reinhart and Rogoff Growth in a Time of Debt. American Economic Review. 100(2) * Rogoff, Kenneth. "Dealing with Developing Country Debt in the 1990s." The World Economy. July World Poverty and Macroeconomics Browse selections on macroeconomic topics from the following: Sachs, Jeffrey. The End of Poverty * Stiglitz, Joseph. Making Globalization Work