Open Economy Macroeconomics

Teacher

The teachers are Eric Pentecost from Loughborough University in Loughborough (UK) and José Villaverde from UC in Cantabria (ES).

Contact

Eric Pentecost Loughborough University
Epinal Way
LE11 3TU Loughborough
United Kingdom
E.J.Pentecost@lboro.ac.uk

José Villaverde Universidad de Cantabria
Avda de los Castros s/n
39005 Santander
Spain
jose.villaverde@unican.es

Pre-requisites

Students must have completed the modules in Advanced Macroeconomics, Advanced Microeconomics and Econometrics in the first semester.

Lecture topics

1. Theories of the balance of trade:

Elasticity, absorption and monetary approaches to the balance of payments on current account

2. Macroeconomic policy in an open economy:

The Mundell-Fleming model in the small country and two country cases

3. The monetary approach to the balance of payments:

Purchasing power parity, perfect capital market integration and the monetary model of the balance of payments revisited.

4. Fixed versus floating exchange rate systems:

Traditional arguments and the modern approach to evaluating alternative exchange rate systems

5. Asset market models of exchange rate determination:

The monetary and portfolio balance approaches; exchange rate overshooting and saddle path equilibrium

6. Target zones and speculative attacks:

Krugman’s target zone model and extensions; application to the EMS. First, second and third generation models of speculative attacks

7. International Financial Crises:

The efficient markets hypothesis. Market failure and bank behaviour. Causes of crises: Minsky-Kindleberger Approach; Rational Speculative Bubbles; Banks’ Failure to Optimise. International monetary reform.

8. International Policy Co-ordination:

Scope, methods and effects.Evaluation of costs and benefits. Obstacles to co-ordination.

Course contents

This course examines the international monetary adjustment process under both fixed and floating exchange rate regimes.

It combines the theoretical and practical aspects of the international adjustment process to examine the determinants of the balance of payments, exchange rates, target zone exchange rate systems, speculative attacks and the performance of floating exchange rates.

Policy debates concerning policy co-ordination, international financial crises and international monetary reform are also covered.

Core reading

  • P. De Grauwe (2005), Economics of Monetary Union, Oxford University Press
  • R. Dornbusch (1980), Open Economy Macroeconomics, Basic Books
  • H.D. Gibson (1986), International Finance, Longman
  • C.P. Hallwood & R. Macdonald (2000), International Money and Finance, 3rd edition Blackwell
  • B.J. Heijdra & F. Van Der Ploeg (2002), The Foundations of Modern Macroeconomics, Oxford University Press
  • M. Obstfeld and K. Rogoff (1996), Foundations of International Macroeconomics, MIT Press, Cambridge, Mass.
  • E.J. Pentecost (1993), Exchange Rate Dynamics, Edward Elgar
  • A. Stevenson, V. Muscatelli & M. Gregory (1988), Macroeconomic Theory and Stabilisation Policy, Philip Allan

Learning outcomes

Upon successful completion of the course, students should be have:

  • An advanced understanding of the major problems facing the international monetary system and the knowledge of alternative macroeconomic policy options and choices.

​Organisation

The course is taught in two weeks of 15 hours of lecturing each.

Assessment

Students are evaluated during a written examof three hours on the different topics.