Download International Finance II (Spring 2013) lecture topics and readings

International Finance II
(Spring 2013)
lecture topics and readings
Objective: to provide coverage of key issues in global finance using appropriate
analytical tools, including dynamic and general equilibrium methods; and in doing so
to develop in students the capacity to apply these techniques to real world problems.
There is no prescribed text for the whole course, but the following textbooks – to be
used selectively – provide useful coverage:
Sarno, L. and M. P. Taylor (2002), The Economics of Exchange Rates. Cambridge
and New York: Cambridge University Press.
Obstfeld, M. and K. Rogoff (1996), Foundations of International Macroeconomics.
Cambridge MA: MIT Press.
Allen, F. and D. Gale (2007), Understanding Financial Crises. Oxford University
Press.
Freixas, Xavier and Jean-Charles Rochet (2008), Microeconomics of Banking, MIT
Press.
Lecture Outline
1. Foreign Exchange Markets (9 hours)
Conditions for efficiency [Sarno and Taylor (2002)]
a. Monetary model of exchange rate determination
b. Lucas (1982) model (flexible price general equilibrium)
Some departures from efficiency
a. Dornbusch model (sticky price small open economy)
Empirical evidence
b. Rational bubbles (in Dornbusch model)
M. Miller and P. Weller (2000) ‘Currency Bubbles which affect
fundamentals” Economic Journal, Vol. 100, pp.170-79
c. ‘Chartists and Fundamentalists; Bulls and Bears’
DeGrauwe, P. and M. Grimaldi (2006), The Exchange Rate in a Behavioural Finance
Framework, Princeton University Press. Chap1 provides an excellent survey of the
empirical literature.
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Corrado, L., M. Miller and L. Zhang (2007) 'Bulls, Bears and Excess Volatility: can
currency intervention help?' International Journal of Finance and Economics, vol. 12,
issue 2, pp. 261-272
2. Exchange rate crisis (10 hours)
a. First Generation Model
Textbook expositions:
Krugman and Obstfeld, International Economics, Ch. 17, appendix III, “The Timing
of Balance of Payments Crises” (elementary).
Obstfeld and Rogoff, Foundations of International Macroeconomics, Ch. 8, section
4.2.
Garber and Svensson, “The Operation and Collapse of Fixed Exchange Rate
Regimes”, in Grossman and Rogoff (eds.), Handbook of International Economics vol.
3.
Agenor and Flood, “Macroeconomic Policy, Speculative Attacks and Balance of
Payments Crises”, in van der Ploeg (ed.), Handbook of International Macroeconomics.
Original journal articles:
Krugman, “A Model of Balance-of-Payments Crises”, Journal of Money Credit and
Banking 1979 (reprinted in Krugman, Currencies and Crises, 1992).
Flood and Garber, “Collapsing Exchange-Rate Regimes”, Journal of International
Economics 1984.
b. Second Generation model
Textbook expositions:
Obstfeld and Rogoff, Foundations of International Macroeconomics, Ch. 9, section
5.4
Original journal articles:
Obstfeld, ‘Models of Currency Crises with Self-Fulfilling Features’, European
Economic Review, 1996.
Sachs,J. A. Tornell and A. Velasco (1996), “The Mexican peso crisis: Sudden death
or death foretold?”, Journal of International Economics, 41(3-4), 265-283.
3. Global General Equilibrium (9 hours)
Lectures:
a. Modelling the World Economy
Obstfeld and Rogoff, Chapter 1.3. ‘A Two-Region World Economy’
and Chap 5.5
b. Global imbalances:
i. Precautionary motive in emerging market economies.
ii. Risk concentration, precautionary savings and global
imbalances.
iii. Asset price bubbles and global imbalances.
Paper for 3b:
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Miller, M., P. Santos-Monteiro and L. Zhang (2011): “Eastern Caution,
Western Exuberance and Global Imbalances”, mimeo, University of Warwick.
Other papers which are relevant:
Concentration of shocks: G.Mankiw (1986) “The equity premium and the
concentration of aggregate shocks” Journal of Financial Economics, 17,211219.
Jeanne, Olivier (2007) “International Reserves in Emerging Market countries:
too much of a good thing?” Brookings Papers on Economic Activity (1: pp.155).
Optional background readings on global imbalances: Wolf, Martin (2009).
Fixing Global Finance.
Student presentation and discussion:
Broner, Fernando A. and Jaume Ventura (2010), “Rethinking the Effects of
Financial Liberalization”, mimeo, Universitat Pompeu Fabra.
4. Credit market imperfection and its macroeconomic impacts (9 hours)
Aiyagari, S. Rao, (1994), “Uninsured Idiosyncratic Risk and Aggregate
Saving”,
Quarterly Journal of Economics, Vol. 109, No. 3, pp. 659-684.
Kiyotaki, Nobuhiro and John Moore (1997), “Credit Cycles”, Journal of
Political Economy, 1997, vol. 105, no. 2.
Korinek, Anton, (2009), “Systemic Risk-Taking: Amplification Effects,
Externalities, and Regulatory Responses”, mimeo, University of Maryland.
5. Banking and Financial Crises (10 hours)
Student presentation of background paper
Brunnermeier, Markus K. (2009), “Deciphering the Liquidity and Credit
Crunch 2007–2008”, Journal of Economic Perspectives, 23(1 ), 77–100.
Lectures
a. Financial panic as a “bank run”
Diamond and Dybvig (1983) or Allen and Gale (2007).
b. Moral Hazard in banking
Hellman, T., K. Murdock and J. Stiglitz (2000) “ Liberalization, moral
hazard in banking and prudential regulation: are capital requirements
enough?” American Economic Review 90(1), 147-65
c. Market concentration, adverse incentive and banking crises:
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Miller, Marcus, Lei Zhang, and Han Hao Li (2010), “Riding for a fall:
monopoly banking with hidden tail risk”, mimeo, University of
Warwick.
Other relevant reading:
Foster, Dean and Peyton Young (2008), "The Hedge Fund Game:
Incentives, Excess Returns, and Piggy-Backing," Economics Series
Working Papers 378, University of Oxford.
Student presentation and discussion:
d. Externalities and Asset Bubbles
Adrian, Tobias and Hyun Song Shin (2008), “Liquidity and Leverage”,
FRB of New York Staff Report No. 328.
6. Final test (3hours)
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