Economics 572, Autumn 2013
International Finance and Macroeconomics

Office: Savery 338
Office Phone:543-6197
Instructor Home Page

Instructor: Yu-chin Chen
Time/Location: M/W 3:30-4:50pm / Savery 157
Office Hours: Fri 11-noon or by appointment


* Syllabus

* Link to solution manual for OR.

Course Schedule and Lecture Notes:

Date Topic Lecture Notes Others
25-Sep Overview + Nominal Exchange Rate Modeling Lecture 1  
30-Sep Nominal Exchange Rate II: UIP and Forward Premium    


Topics and Readings:

(* indicates required readings)

The following outline gives a guide to the material that will be covered in the course. Again, please check the course website for up-to-date reading schedules and class notes. ( A “*” indicates required readings, while those with a “–“ are recommended.)

0. Overview

- Obstfeld, Maurice, Mundell-Fleming Lecture: "International Macroeconomics: Beyond the Mundell-Fleming Model", IMF Staff Papers, Vol. 47 Special Issue, 2001.

- Obstfeld, Mauriece and Kenneth Rogoff, “Six Major Puzzles in International Finance: Is There a Common Cause?" NBER Macro Annual 2000.

1. Exchange Rates and Fundamentals

* Mark, Ch. 3, Ch. 8

* OR, Ch. 8.1-8.3, 8.7; Ch. 9.1-9.4

* Engel, Charles, (2013) “Exchange Rates and Interest Parity”, Handbook of International Economics, Vol IV, edited by Gopinath, Helpman, Rogoff, 2013.

* Frankel, Jeffrey and Andrew Rose (1994) "A Survey of Empirical Research on Nominal Exchange Rates." In Gene Grossman and Kenneth Rogoff (editors) Handbook of International Economics, Volume 3 (North-Holland, 1995).

* Engel, Charles and Kenneth D. West (2005) “Exchange Rates and Fundamentals.” Journal of Political Economy 113(3) (June 2005): 485-517. DOI: 10.1086/429137

- Bacchetta, Philippe and Eric van Wincoop. “Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?” American Economic Review 96(3) (June 2006): 552-576.

- Engel, Charles, and Nelson C. Mark and Kenneth West. “Exchange Rate Models Are Not As Bad As You Think,” in NBER Macroeconomics Annual 2007, Vol. 22., edited by Daron Acemoglu, Kenneth Rogoff and Michael Woodford, 381-441. Chicago: University of Chicago Press, 2008.

- Rogoff, K. “Comment on ‘Exchange Rate Models are Not as Bad As You Think,’” in NBER Macroeconomics Annual 2007,Vol. 22., edited by Daron Acemoglu, Kenneth Rogoff and Michael Woodford, 443-452. Chicago: University of Chicago Press, 2008.

- Mark, N.C. 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictabiltiy," American Economic Review. 85, 201-218

- Meese, R. and K. Rogoff. 1983. "Empirical Exchange Rate Models of the Seventies: Do The Fit Out of Sample? Journal of International Economics 14, 3-24.

2. The FX Forward Premium

Bansal, R. and I. Shaliastovich. 2013. "A Long-run Risks Explanation of Predictability Puzzles in Bond and Currency Markets," Review of Financial Studies.

Brandt, Michael W., John Cochrane, and Pedro Santa-Clara, "International Risk-Sharing is Better Than You Think, or Exchange Rates are Too Smooth," Journal of Monetary Economics, May 2006, 53 (4), 671–698.

Burnside, C., M. Eichenbaum, I. Kleshchelski, and S. Rebelo. 2010. "Do Peso ProblemsExplain the Return to the Carry Trade?" Review of Financial Studies 24(3), 2011, 853-91.

Engel, C. 2012. "The Real Exchange Rate, Real Interest Rates, and the Risk Premium," mimeo.

Verdelhan, A. 2010. "A Habit Based Explanation of the Exchange Rate Risk Premium." Journal of Finance, 65: 123-146.

Mark, N. and Y. Wu, 1998. "Rethinking Deviations from Uncovered Interest Parity: The role of covariance risk and noise." Economic Journal, 108, 1686-1706.

Chinn, Menzie, Yin-Wong Cheung and Antonio Garcia Pascual, 2005. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?" Journal of International Money and Finance 24: 1150-1175.

Evans, M.D.D. 2012. "Dark Matter." mimeo.

Verdelhan, A. 2013. "The Share of Systematic Variation in Bilateral Exchange Rates", mimeo.

3. Intertemporal Approach to Current Account Determination

* OR Ch. 2.1-2.3, 2.5

* Rogoff, K. and M. Obstfeld, "The Intertemporal Approach to the Current Account," in Handbook of International Economics vol. 3, Gene Grossman and Kenneth Rogoff (eds.), (Amsterdam: Elsevier Science Publishers B.V., 1995)

* Blanchard, O., and Giavazzi (2002), "Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?" Brookings Papers on Economic Activities.

- Feldstein, M., and C. Horioka (1980) “Domestic Savings and International Capital Flows,” Economic Journal 90 (358) June, 314-329.

- Baxter, Marianne and Mario Crucini (1993) “Explaining Saving-Investment Correlations,” American Economic Review, 83 (3) June, 416-36.

- Backus, David K., Patrick Kehoe and Finn Kydland (1992), “International Real Business Cycles,” Journal of Political Economy, 100 (4) August, 745-775.

-Nason, James M. and John H. Rogers (2000) “Investment and the Current Account in the Short Run and the Long Run,” Journal of Money Credit and Banking, 34, 967-86

- 2005 NBER Current Account Imbalances Conference:

- Backus D. and F. Lambert, “Current Account: Fact and Fiction”, Working Paper. (

2. International Capital Flows and Risk Sharing

* OR, Chapter 5.1-5.5

* Lewis, K., "Puzzles in International Financial Markets," Handbook of International Economics Chapter 37

* Baxter, M., and U. Jermann (1997), “The international diversification puzzle is worse than you think,” American Economic Review 87, pp 170-180

* Tesar, L., and I. M. Werner (1995), “Home Bias and High Turnover, “ Journal International Money and Finance, 14 (4), 467-492.

- Lucas, Robert (1982), “Interest rates and currency prices in a two-country world,” Journal of Monetary Economics 10 (November) pp. 335-360

- Lewis, Karen (1996), “What Can Explain the Apparent Lack of Consumption Risk Sharing?” Journal of Political Economy 104 pp 267-297

- Lewis, Karen (1999), “Trying to Explain Home Bias in Equities and Consumption,” Journal of Economic Literature 37 pp 571-608

- Obstfeld, Maurice (1994), “Risk-Taking, Global Diversification and Growth,” American Economic Review, December

- Kalemli-Ozcan, S., B. Sorensen, and O. Yosha (2003), “Risk-Sharing and Industrial Specialization: Regional and International Evidence,” American Economic Review

3. Purchasing Power Parity and the Real Exchange Rate
* OR, Chapter 4.1-4.4

* Mark, Chapter 7.

* Engel, C., "Accouting for US Real Exchange Rate Changes," Journal of Political Economy 107, June 1999, 507-538.

* Froot, K., and K. Rogoff, "Perspectives on PPP and Long-Run Real Exchange Rates," in Handbook of International Economics vol. 3, Gene Grossman and Kenneth Rogoff (eds.): 1647-88. NBER Working Paper 4952.

* Rogoff, K., "The Purchasing Power Parity Puzzle," Journal of Economic Literature 34, June 1996, 647-68.

* Engel, C., and J. Rogers, "How Wide Is the Border," American Economic Review, 86, December 1996, 1112-1125.

- Taylor, A., "Potential Pitfalls for the Purchasing-Power Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica 69 (March 2001): 473-98; also NBER Working Paper No. 7577, February 2000.

- Imbs, J., H. Mumtaz, M. Ravn, and H. Rey, "PPP Strikes Back: Aggregation and the Real Exchange Rate," NBER WP9372 December 2002.

- Chen, S., and C. Engel, "Does `Aggregation Bias’ Explain the PPP Puzzle?" , manuscript, February 2004, University of Wisconsin, Madison.


Calvo, G. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics

Choi, H. 2012. "The Role of Establishment Heterogeneity in the Recovery from Sudden Stops," mimeo, Monash University.

Flood, R. and P Garber, 1984. "Collapsing Exchange- Rate Regimes: Some Linear Examples," Journal of International Economics 17: pp. 1-13.

Mendoza, E. 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review 100: 1941-1966.

- Engel, C., 1996, "The Forward Discount Anomaly and the Risk Premium: A Survey of the Recent Experience," Journal of Empirical Finance 3: 123-192.

- Mark, N., 1995, "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review 85(1): 201-218.

- Rogoff, K., "Dornbusch’s Overshooting Model After Twenty-Five Years," IMF Staff Papers 49, Special Issue, 2002, pp. 1-35. ).

- Eichenbaum, M., and C. Evans, 1995, “Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates,” Quarterly Journal of Economics, 110 (4), November, 975-1009.

- Meese, R., and K. Rogoff, "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?" in Jacob Frenkel (ed.), Exchange Rates and International Macroeconomics (NBER and University of Chicago Press, 1983), 67-105.

- Mark, Nelson, and Donggyu Sul, 2001, “Nominal Exchange Rates and Monetary Fundamentals: Evidence from a Small post-Bretton Woods Panel,” Journal of International Economics 53(1): 29-52.

- Faust, Jon, John Rogers and Jonathan Wright, 2001, "Exchange Rate Forecasting: The Errors We've Really Made," mimeo (Federal Reserve Board, September).

5. New Open Economy Macroeconomics

* OR, Ch 10

- Mark, Ch 9

* Lane, P. (2001) "The New Open Economy Macroeconomics: A Survey," Journal of International Economics 54(2), 235-266.

* Corsetti, G., and P. Pesenti (2001) “Welfare and Macroeconomic Interdependence,” Quarterly Journal of Economics 116(2), 421-445.

* Obstfeld, M., and K. Rogoff (1995) “Exchange Rate Dynamics Redux,” Journal of Political Economy 103, 624-60.

* Obstfeld, M., and K. Rogoff (2000) "New Directions in Stochastic Open Economy Models," Journal of International Economics 48, 117-153. Also NBER WP 7313.

* Obstfeld, M., and K. Rogoff (2001) “Risk and Exchange Rates,” in Elhanan Helpman and Effraim Sadka (eds.), Contemporary Economic Policy: Essays in Honor of Assaf Razin. Cambridge: Cambridge University Press 2002. Also, NBER Working Paper 6694.

* Obstfeld, M., and K. Rogoff (2002) “Global Implications of Self-Oriented National Monetary Rules,” Quarterly Journal of Economics 117, 503-535.

* Betts, Caroline and Michael B. Devereux (1996) “The Exchange Rate in a Model of Pricing-to-Market,” European Economic Review, 40 (3-5) April, 1007-1021.

* Betts, Caroline and Michael B. Devereux (2000) “Exchange Rate Dynamics in a Model of Pricing-to-Market,” Journal of International Economics 50, 215-44.

* Bacchetta, Philippe and Eric van Wincoop (2000) “Does Exchange-Rate Stability Increase Trade and Welfare?” American Economic Review 90, 1093-1109.

*Devereux, M., and C. Engel (2003) “Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility,” Review of Economic Studies 70, 765-783.

- Oudiz, Giles and Jeffery Sachs (1984) “Macroeconomics Policy Coordination Among the Industrial Countries,“ Brookings Papers on Economic Activity 1, 1-64.

- Benigno, Giancarlo and Pierpaolo Benigno (2003) “Price stability in Open Economies,”Review of Economic Studies, 70, 743-764.

- Benigno, Pierpaolo (2002) “A Simple Approach to International Monetary Policy Coordination,” Journal of International Economics 57, 177-196.

- Clarida, R., J. Gali and M. Gertler, 2001 , “Optimal monetary policy in open versus closed economies,” American Economic Review 91, 248-252.

- Clarida, Richard, Jordi Gali, and Mark Gertler, "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review Papers and Proceedings 91 (2), May 2001, pp. 248-252.

- V.V. Chari, Patrick Kehoe, and Ellen McGrattan, “Can Sticky Price Models Generate Volatile and Persistent Exchange Rates?” Review of Economic Studies 69(3), August 2002, 533-563.

- Obstfeld, Maurice, “Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics,” 2002, NBER WP #9118

6. Speculative Attacks

* OR, Ch 8.4-8.6, 9.5

* Mark, Ch 11.

* Krugman, Paul, "A Model of Balance of Payment Crisis," Journal of Money, Credit and Banking, Vol. 11 (1979), pp. 311-325.

* Stephen Morris and Hyun Song Shin, "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review 88 (June 1998), 587-97. (See also the correction to Morris and Shin's theorem 2 in Frank Heinemann, "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review 90 (March 2000), 316-18.)

* Obstfeld, Maurice, "The Logic of Currency Crises," in Barry Eichengreen, Jeffry Frieden, and Jurgen von Hagen, eds., Monetary and Fiscal Policy in an Integrated Europe (New York: Springer), pp. 63-90.

* Roberto Chang and Andres Velasco, “A Model of Financial Crises in Emerging Markets,” Quarterly Journal of Economics 116(2) 2001, 489-517.

- Phillippe Aghion, Philippe Bacchetta, and Abhjit Banerjee, "A Simple Model of Monetary Policy and Currency Crises" European Economic Review 44(4-6), 2000, 728-738.

- Graciela Kaminsky and Carmen Reinhardt, "The Twin Crises: The Causes of Banking and Balance of Payments Problems," American Economic Review 89, June 1999, 473-500

7. Sovereign Risk and Imperfections in International Capital Markets

* OR, Ch. 6.

* Eaton, Jonathan and Raquel Fernandez (1995), “Sovereign Debt,” Handbook of International Economics Chapter 39

- Eaton, Jonathan and Mark Gersovitz (1981), “Debt with potential repudiation: Theory and estimation,” Review of Economic Studies 48, pp. 289-309

- Bulow, Jeremy and Kenneth Rogoff, "Sovereign Debt: Is to Forgive to Forget?" American Economic Review 79 (March 1989), 43-50.

- Cole, Hal and Patrick Kehoe, "Reviving Reputation Models of International Debt," Federal Reserve Bank of Minneapolis Quarterly Review (Winter 1997).

- J. Bulow and K. Rogoff, "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy 97 (February 1989), 155-78.

- Olivier Jeanne, Foreign currency debt and the global financial architecture, European Economic Review (44)4-6 (2000) pp. 719-727

- Kletzer, Kenneth and Brian Wright (2000), “Sovereign debt as intertemporal barter,” American Economic Review 90, pp. 621-639

- Philip Lane and Gian Maria Milesi-Ferretti, "The External Wealth of Nations: Measure of Foreign Assets and Liabilities for Industrial and Developing Countries," International Monetary Fund Working Paper WP/99/115, August 1999.

- Lane, Philip, "Empirical Perspectives on Long-Term Debt," mimeo, Trinity College, Dublin.