UNIVERSITY OF WASHINGTON 
Department of Economics
Open Economy Macroeconomics Econ 472

Instructor:

Theo S. Eicher

(: 

206 685 8082

Office: 

Condon Hall 532

Office hours: 

WED 1-3pm (please schedule at http://www.econ.washington.edu/user/te/officehours/)

Class web page: 

http://depts.washington.edu/teclass/  (username: econ472, password: econ)

Email:

teclass@u.washington.edu (answered twice a week after office hours)

Prerequisites:

·         You must have completed a course in Intermediate Macroeconomics (Econ 300/301). I suggest you mastered International Trade (Econ 371) before enrolling in Open Economy Macroeconomics. You must possess a firm grasp of Calculus.

Homework:

·         The OUTLINE below sequences dates, topics, and homework. WEB READING refers to a web links that feature required readings.

·         The textbook for the class is "International Economics" by J. Mutti, T.S. Eicher and M. Turnovsky (6th Edition, Paperback, Routledge 2009). It is provided free of charge in the WEB READING.

·         You MUST READ the Wall Street Journal BEFORE each class. Focus on the "Foreign Exchange" section.  I highly recommend you read the WSJ online, where you can search every day for keywords such as "exchange rate" and find out articles that you might miss in the printed edition.

·         Check out forexnews.com [check the tab under "FUNDAMENTALS"] before each class.  Focus on the sections "News & Analysis" and "Analysis & Ideas."  The "EDUCATION" tap is also interesting.

·         This course represents a learning process. I expect every student to respect the integrity of this process. That entails reading assignments before class and participating attentively in class discussions.

·         You will be engaged in class to show that you can employ the assigned readings to conduct economic analysis.

·         If you have not mastered the prerequisite skills (you will find out after the first quiz), then you must expect to spend additional time.

·         All written homework must be typed, Graphs and equations can be handwritten.

·         The final presentation must be in PowerPoint.

·         At this point the class website is experimental and not comprehensive.

Suggested Materials:

·         I strongly recommend a 10 week subscription to the Wall Street Journal which costs about $20. We will usually start class with a discussion of the credit market section in the WSJ. Also, as often as current events allow, we will discuss articles from the WJS. Given the high frequency of recent currency crises, I hope to be referring to the WSJ frequently.

References

Books that may be helpful to obtain alternative explanations of what you have learned in class:

·         Caves, R.E, J.A Frankel and R.W. Jones. World Trade and Payments. NY: Harper Collins College Publishers

·         Mankiw, G. Macroeconomics NY Worth Publishers This is a good review for the first quiz.

·         Krugman, P. and M. Obstfeld International Economics McGrawHill.

Miscellaneous:

·             If you have special needs, requests, requirements, please come see me immediately.

·             I believe in the Honor Code. Students are on their honor not to cheat and to report instances of cheating that they observe. In exchange, it was a violation of the honor code for professors to suspect cheating for example, by proctoring exams or refusing to  give take-home exams.  Under the honor system students have a twofold obligation: individually, they must not violate the code, and as a community, they are responsible to see that suspected violations are reported.

Grading:

·         Late homework cannot be accepted, since answers are posted immediately after class on the web site.

·         If you miss an exam for valid and documented reasons (see the Student Handbook), I invite you to talk to me how you'll be tested to show your knowledge of the covered material.

·         Your grading is based on

o        50% -- One Quiz and two midterm exams

o        20% -- Contribution to class discussions, to prove your ability to utilize the assigned and learned material for economic analysis. Note that class contribution grade does not include class attendance! (I.e. you do not get a grade just because you attended class)

o        20% -- Written homework assignments (the paper counts as one homework)

o        10% -- Group presentation.

·         Extra Credit: If you have comments on the web reading regarding spelling, style, grammar, context, understanding or other mistakes, please print out the specific page of the WEB READING, make the suggested changes on the page (or indicate what is unclear) and hand it to me at your convenience with your name on top. 

·         I encourage you to come to my office hours. If you have a time conflict with my office hours, talk to me and we arrange an alternative time.

Class Participation

    I value class participation, which does not mean that I value only correct answers! Wrong answers are part of the process of tying to tackle difficult questions. Class participation can make a big difference in your learning. Actively talking and thinking economics is crucial to further your economic intuition. It would be nice if we had time to take one hour every once in a while and discuss a current event or breaking economic news in class. I encourage you to ask for such an hour whenever you find something in the newspaper that you think might be appropriate. These discussions can be interesting and a lot of fun interesting if you are willing to participate.


    If you are not prepared to answer a question you can simply answer PASS to deflect a question without consequence.  However, PASSING all the time is a negative signal.

 

    I realize that my teaching philosophy that is not altogether standard, and would like to make every effort to communicate to you beforehand what to expect, to help you make an educated choice if this class is right for you. Let me quote a bit from Erich Fromm's To Have or to Be (1978 London: Sphere Books) where he provides a good example of what type of learning I favor.  Fromm distinguishes between a "having" mode (acquiring stuff) and a "being" existence, which is based on experiential living.

    Students in the having mode of existence will listen to a lecture, hearing the words and understanding their logical structure and their meaning and, at best they can write down every word in their loose-leaf notebooks so that later on they can memorize their notes and thus pass an examination. But the content does not become part of their own individual system of thought, enriching or widening it. The student and the content of the lectures remain strangers to each other, except that each student has become the owner of a collection of statements made by someone else.
    The process of learning has an entirely different quality for students in the being mode of relatedness to the world.  To begin with, they do not go to a course of lectures as tabulae rasae [Latin for "blank slates"]. The have thought beforehand about the problems the lectures will be dealing with and have in mind certain questions and problems of their own.  They have been occupied with the topic and it interests them. Instead of being passive receptacles of words and ideas they listen, they hear and most important they receive and they respond in an active, productive way. They do not simply acquire knowledge that they can take home and memorize. Each student has been affected and has changed: each is different after the lecture than he or she was before it.

From Erich Fromm "To Have or to Be" (1978 London: Sphere Books), Chapter II

This is not to say that having and being students do not share an intake and understanding about the subject matter, but that a student in the being mode brings a dynamic exchange to class, with opinions, dissention, and curiosity: this is the environment I wish to cultivate.  To this end, I will make every attempt to engage you actively, to make your mind work in this class rather than bombard you with lectures.  I may call on students randomly and also take hands, as I am interested in the effect each class is having on the individual. This is not meant as a test of your attention: rather, it is in keeping with the being philosophy Eric Fromm has so eloquently articulated.

 

 

·         Learning Goals:
Understand and be able to use the terminology of the international macro economy

·         Understand the fundamental determinants of exchange rate movements

·         Understand alternative approaches to exchange rate regimes and their implications

·         Be able to analyze the impact of fiscal, monetary and exchange rate policy in the open economy and their impact on interest, prices, employment and output.

·         Be able to understand the currency market sections in popular newspapers, their value, lingo, and representation of current events

·         Collect, use and interpret economic data to provide a country analysis of international transactions and economic conditions

·         Display economic data in a meaningful manner, consistent with economic models to interpret country performance.

·         Assess critically the economic content of newspaper and journal articles

·         Be able to express ideas to others visually, verbally, and in writing

·         Contribute to live analysis of economic puzzles using arguments rooted in economic models.

·         With the exception of Pure Trade Theory and Commercial Policy you have studied, up to now, exclusively the mechanics of a "closed" economy. However, international economic interaction has profound effects on domestic economic performance. As the term Open Economy Macroeconomics indicates, the subject concerns itself with the usual Macroeconomic variables: employment, interest rates, national income, etc., but within an international or "open" economy framework. Openness adds a few key variables, such as exchange rates, trade balance and capital flows to our list. The subject is also known as International finance or International Macroeconomics.

·         More specifically, this class concerns itself with the determination of the exchange rate, output employment, interest rates, money stocks, reserves, aggregate price levels, and the international flow of capital. DON'T BE MISLEAD! Unfortunately, the course will teach you little about how to make money on a global scale. You will learn how changes in the real and nominal variables affect prices out put at home and abroad. Finally we examine the policy options that a country processes or the tough policy options it must fact to regulate foreign economic influences. 

 

Important Notices:

·                     If you have problems connecting to any of the links check out http://www.lib.washington.edu/help/connect.html

·                     If you had problems downloading readings/case studies, please send me an email asap, THANK YOU 

·                     The chapters for the WEB READING can be found at http://depts.washington.edu/teclass/bc

·                     All homework assignments are links that you can reach from this web page

·                     Most of the case studies have questions on the very last page, please scroll to the end of the document.

·                     The outline is preliminary and subject to change. Please check before every class!

·                     IMPORTANT: reading the Chapter READING includes the reading and preparation of the Chapter Case Studies

OUTLINE

 

Date

Topic

Reading Assignment and written Assignments due.

(Please read the assignments in each row to prepare for the class date in the same row)

Sept 25

Introduction 

·         Understanding the Syllabus and the Course 

·         Review IS/LM, Real/Nominal CPI, Elasticities

·         WEB REVIEW (not comprehensive)

·         Review IS/LM and policy shifts using your intermediate macroeconomics notes

Sept 30

Quiz 1  (1 hour, 50 minutes)

 

Oct 2

Essential Terminology

·         Balance of Payments 

·         Exchange rates, markets, regimes 

·         Marshal Learner Condition 

·         J Curve

·         WEB READING Chapter 12 and Chapter 13

·         Case Study: J-Curve

·         Case Study: Supply and Demand for Foreign Currency

Oct 7

History of Exchange Rate Regimes

·         Pros and Cons of the Gold Standard  

·         Species Flow Mechanism 

·         Bretton Woods

·         WEB READING Chapter 21

·         Case Study

·         Homework 1 (J Curve) due

·         Solution to Homework 1

Oct 9

The Simplest Small Open Economy Model

·         Assumptions 

·         Implications 

·         What does the data say? 

·         Policy Implications

·         Fiscal 

·         Monetary 

·         WEB READING Chapter 14 (the entire chapter but SKIP SECTION ON FLEXIBLE EXCHANGE RATES)

·         Case Study

·         Case Study

 

Oct 14

The Large Open Economy

·         Assumptions 

·         Implications 

·         Comparison of Multipliers 

·         Policy Implications

·         WEB READING Chapter 15 READ ONLY THE PART STARTING WITH "THE LARGE OPEN ECONOMY" TO THE END OF THE CHAPTER

·         Case Study

·         Homework 2 due

·         Solution to HW2

Oct 16

Paradise Lost

·         Expenditure Switching  

·         Expenditure & Reducing

·         Flexible exchange rates

·         WEB READING Chapter 15 READ FROM THE BEGINNING OF THE CHAPTER TO "The Simple Policy Alternative: Non-sterilization and the Monetary Approach to the Balance of Payments"

·         Case Study

·         WEB READING Chapter 14 ONLY THE SECTION ON FLEXIBLE EXCHANGE RATES

Oct 21

Who Needs Policy?

 

·         Monetary Approach to the Balance of Payments

(Mundell’s version of the Species Flow Mechanism)

·         Non sterilization

·         WEB READING Chapter 15 READ FROM "The Simple Policy Alternative: Non-sterilization and the Monetary Approach to the Balance of Payments" TO :The Swan Diagram"

·         Case Study

·         Homework 3 due

·         Solution to Homework 3

Oct 23

International Capital Markets

·         Overview

·         “The Billion Dollar Day”

·         Assignment of Presentation Groups

·         WEB READING Chapter 16 SKIP SECTION ON TECHNICAL ANALYSIS]

·         Homework 4 due

·         Graphs for Article in homework 4

·         Solution to Homework 4

Oct 28

Modeling International Capital Markets

·         Interest Parity and the Capital Account 

·         Derive External Balance (BP = 0) 

·         Integrate External Balance into IS/LM

·         WEB READING Chapter 17

·         Case Study

Oct 30

Short Term Capital Market Movements

·         Fundamentals of Technical Analysis 

·         Guest Speaker: Bryan Morales, (BA UW '02, Vice President, Lehman Brothers
Corporate & Portfolio Sales
Global Foreign Exchange)

·         WEB READING Chapter 16 READ ONLY THE SECTION ON TECHNICAL ANALYSIS

·         Case Study

·         Morales Slide Show (uploaded after presentation)

Nov 4

Midterm (1 hour, 50 minutes)

 

Nov 6

Mundell Fleming Model: Fixed Exchange Rates

 

·         Goods Market, Financial Market, External and Internal Balance

·         Fiscal and Monetary Policy

·         WEB READING Chapter 18

·         Case Study (hint: think how RISK will shift the BP=0 line

Nov 11

Veterans Day

 

Nov 13

Mundell Fleming Model: Flexible Exchange Rates

 

·         Fiscal and Monetary Policy 

·         Goods Market, Financial Market, External and Internal Balance

·         WEB READING Chapter 19 READ UP TO "The Large Open Economy under Flexible Exchange Rates"

·         Case Study1

·         Case Study2

Nov 18

Mundell Fleming Model: Large Open Economy

·         Policy

·         Review

Price Adjustments in the Mundell Fleming Model

·         WEB READING Chapter 19 READ FROM  "The Large Open Economy under Flexible Exchange Rates" TO THE END OF THE CHAPTER

·         Case Study

Nov 20

Price Flexibility

·         Sticky Prices and Mundell Fleming

·         Purchasing Power Parity

·         Law of One Price

·         Theory and Reality

·         WEB READING Chapter 20 READ UP TO THE  "Monetary approach to the exchange rate"

·         Case Study

Nov 25

Midterm II (1 hour, 50 minutes)

 

Nov 27

Thanksgiving

 

Dec 2

Mundell Fleming Model: Real World Applications

·         Presentations Brazil/Uruguay

Start your research with the Library's 

·         Sample Presentation (without commentary)

·         Currency Crisis Links (web link)

Dec 4

Mundell Fleming Model: Real World Applications

·         Presentations China / Argentina

Same as previous class

Dec 8

Paper due 5 pm under my office door

 

 

Presentation Guidelines

1.      The presentations are applications of the Mundell Fleming Model to the real world.

2.      Each country will have two groups. One group covers the pre crisis events, the other group covers the post crisis events.

3.