ECON 269

INTERNATIONAL MACROECONOMICS
Winter 2007

Professor: Fabio Milani, fmilani@uci.edu

Office Hours: SSPA 3145, Thu 3.00-4.30 PM

Time and Location: Tu-Th 9.30-10.50 PM

Course Webpage: http://www.socsci.uci.edu/~fmilani/econ269.html

Grading:
Assignments 20%
Referee Report 20%
In-Class Presentations 20%
Paper 40%

Course description:
There will be about 3-4 assignments in the quarter. You can work in groups, but each
member has to turn in the homework individually. There will be no final exam in the
course. Instead, you will have to write a paper on an international macro topic. The paper
can be an original contribution or a survey of a particular topic. There will be some in-
class presentations in which you will be responsible to present an overview of the papers
in one area of the syllabus. You will also have to complete a referee report on one of the
papers listed.

Books:

Foundations of International Macroeconomics, by

Maurice Obstfeld and Kenneth Rogoff, MIT Press, October 1996.

International Macroeconomics and Finance: Theory and Empirical Methods, by

Nelson Mark, Blackwell Publisher, September 2001.

Others:

The Economics of Exchange Rates, Sarno and Taylor

Handbook of International Economics
Handbook of International Macroeconomics

Useful websites for international macroeconomists:

http://www.econ.yale.edu/~corsetti/euro/
http://www.geocities.com/brian_m_doyle/open.html
http://www.geocities.com/monetaryrules/mpoe.htm
Reading List - PRELIMINARY
(Highly recommended readings are indicated by a ' * ')

1. The Intertemporal Approach to the Current Account

1.1. The Basic Theoretical Framework

Dornbusch, Rudiger (1983): “Real Interest Rates, Home Goods, and Optimal External
Borrowing”. Journal of Political Economy, 91, 141-153..
Obstfeld, Maurice (1982): “Aggregate Spending and the Terms of Trade: Is There a
Laursen-Metzler Effect?” Quarterly Journal of Economics, 97 (May), 251-
270.
* Obstfeld, Maurice and Kenneth Rogoff (1995): "The Intertemporal Approach to the
Current Account". In: Gene M. Grossman and Kenneth Rogoff (eds.):
Handbook of International Economics, Volume 3, North Holland,
Amsterdam.
* Obstfeld and Rogoff (1996), ch. 1, 2, and 4.
*Kraay, A. and J. Ventura, "Current Accounts in Debtor and Creditor
Countries", Quarterly Journal of Economics, November 2000.
Razin, Assaf (1995): “The Dynamic Optimizing Approach to the Current Account:
Theory and Evidence”. In: Peter B. Kenen (ed.): Understanding
Interdependence: The Macroeconomics of the Open Economy. Princeton
University Press, Princeton, NJ. Chapter 3.
* Rogoff, Kenneth (1996): “The Purchasing Power Parity Puzzle”. Journal of
Economic Literature, 34 (June), 647-688.
Sachs, Jeffrey (1981): “The Current Account and Macroeconomic Adjustment in the
1970s”. Brookings Papers on Economic Activity, 1, 201-282.
Ventura J., “Towards a Theory of Current Accounts”.

1.2. Empirical Issues

Bergin, Paul R. and Steven M. Sheffrin (2000): “Interest Rates, Exchange Rates, and
Present Value Models of the Current Account”. The Economic Journal, 110
(April), 535-558.
* Glick, Reuven and Kenneth Rogoff (1995): “Global vs. Country-Specific
Productivity Shocks and the Current Account”. Journal of Monetary
Economics, 35, 159-192.
Ghosh, Atish R.(1995): “Capital Mobility Amongst the Major Industrialized
Countries: Too Little or Too Much?” Economic Journal, 105, 107-128.
Gruber, Joseph W. (2001): “A Present Value Test of Habits and the Current
Account”. Mimeo, Johns Hopkins University.
* Nason, James M. and John H. Rogers (2003): “The Present-Value Model of the
Current Account Has Been Rejected: Round Up the Usual Suspects”.
Journal of International Economics.
Sheffrin, Steven M. and Wing T. Woo (1990): “Present-Value Tests of the Current
Account”. Journal of International Economics, 29, 237-253.
Feldstein, M. and C. Horioka, "Domestic Savings and International Capital
Flows", Economic Journal 90 (June): 314-29, 1980
2. Risk Sharing and International Real Business Cycles.

2.1. Complete Markets and Risk Sharing

*Obstfeld and Rogoff, chapter 5.

Brandt M., Cochrane J. and P. Santa Clara, 2005. "International Risk Sharing
is better than you think (or exchange rates are much too smooth) ",
forthcoming Journal of Monetary Economics (also NBER WP 8404).
Lewis K. (1996), "What can explain the apparent lack of consumption risk
sharing?" Journal of Political Economy 104 (April): 267-97.
Obstfeld, M., “Are Industrial Country Consumption Risks Globally
Diversified?”, in L. Leiderman and A. Razin, eds, Capital Mobility, The Impact
on Consumption, Investment and Growth, Cambridge University Press, New
York, 1994.
Obstfeld, M., "Risk-Taking, Global Diversification and Growth", American
Economic Review 84, (December): 1310-29, 1994
Svensson, L.: "Trade in Risky Assets", American Economic Review, pp. 375-
394, (June) 1988
* Obstfeld, Maurice and Kenneth Rogoff (2000): “The Six Major Puzzles in
International Macroeconomics: Is There a Common Cause?” In: Ben
Bernanke and Kenneth Rogoff (eds.): NBER Macroeconomics Annual.
Cambridge: MIT Press.
* Lewis, Karen K. (1999): “Trying to Explain Home Bias in Equities and
Consumption”. Journal of Economic Literature, 37, 571-608.
Cole, Harold L. and Maurice Obstfeld (1991): “Commodity Trade and International
Risk Sharing: How Much Do Financial Markets Matter?” Journal of
Monetary Economics, 28, 3-24.
Schmitt-Grohé, Stephanie and Martin Uribe (2003): “Closing Small Open Economy
Models”. Journal of International Economics.

2.2 Incomplete Markets

* Kehoe, Patrick J. and Fabrizio Perri (2002): “International Business Cycles with
Endogenous Incomplete Markets”. Econometrica, 70(3), pp. 907-928.

2.3 International Portfolio Diversification

French K. and J. Poterba, 1991, "Investor diversification and international

equity markets”, American Economic Review 81, 222-226.
Lewis K., "International Home Bias in International Finance and Business
Cycles", NBER WP #6351, January 1998
Lewis K., "Puzzles in International Financial Markets" in Handbook of
International Economics, Gene Grossman and Ken Rogoff, ed, North Holland,
1995 also NBER WP 4951;
*Heathcote, J. and F. Perri, “The International Diversification Puzzle is not as
bad as you think”
Baxter M. and U. Jerman, 1997, "The international diversification puzzle is
worse than you think", American Economic Review, 87(March)
Baxter M, U. Jermann and R. King, “Nontraded Goods, Nontraded factors and
International Nondiversification”, Journal of International Economics, April
1998, 211-229.
Serrat A., “A Dynamic Equilibrium Model of International Portfolio Holdings,”
Econometrica, Nov 2001.
*Pavlova A and R. Rigobon, “Asset Prices and Exchange Rates”, forthcoming
Review of Financial Studies, 2006

3. International Real Business Cycles

3.1. Empirical Issues

* Backus, David and Patrick J. Kehoe (1992): “International Evidence on the

Historical Properties of Business Cycles”. American Economic Review, 82,
864-888.
Costello, Donna M. (1993): “A Cross-Country, Cross-Industry Comparison of
Productivity Growth”. Journal of Political Economy, 101, 207-222.

3.2. Small Open Economy Models

Correia, Isabel, Joao C. Neves, and Sergio Rebelo (1995): “Business Cycles in a
Small Open Economy”. European Economic Review, 39 (June), 1089-1113.
Finn, Mary G. (1990): “On Savings and Investment Dynamics in a Small Open
Economy”. Journal of International Economics, 29, 1-21.
* Mark (2001), ch. 5.
Mendoza, Enrique G. (1995): “The Terms of Trade, the Real Exchange Rate, and
Economic Fluctuations”. International Economic Review, 36, 101-137.
* Schmitt-Grohé, Stephanie (1998): “The International Transmission of Economic
Fluctuations”. Journal of International Economics, 44, 257-287.
Tesar, Linda L. (1991): “Savings, Investment and International Capital Flows”.
Journal of International Economics, 31, 55-78.

3.3. Two-Country Models

* Backus, David K., Patrick J. Kehoe, and Finn E. Kydland (1992): “International
Real Business Cycles”. Journal of Political Economy, 100:4 (August), 745-
775.
Backus, David K., Patrick J. Kehoe, and Finn E. Kydland (1994a): “Dynamics of the
Trade Balance and the Terms of Trade: The J-Curve”. American Economic
Review, 84, 84-103.
Backus, David K., Patrick J. Kehoe and Finn E. Kydland (1994b): “Relative Price
Movements in Dynamic General Equilibrium Models of International Trade”.
In: Frederick Van Der Ploeg (ed.): The Handbook of International
Macroeconomics, Cambridge, Ma: Basil Blackwell.
* Baxter, Marianne (1995): "International Trade and Business Cycles". In: Gene M.
Grossman and Kenneth Rogoff (eds.): Handbook of International Economics,
Vol. III. Amsterdam: North Holland.
* Baxter, Marianne and Mario J. Crucini (1995): "Business Cycles and the Asset
Structure of Foreign Trade". International Economic Review, 36:4, 821-854.
Backus, D. ,P. Kehoe and F. Kydland, ''Dynamics of the trade balance and the
terms of trade: the J curve ?'' American Economic Review, March 1994
Baxter M. and M. Crucini, “Explaining Saving –Investment Correlations”,
American Economic Review June 1993, p 416-436.
Betts, Caroline M. and Timothy J. Kehoe (2001): “Tradability of Goods and Real
Exchange Rate Fluctuations”. Federal Reserve Bank of Minneapolis Staff
Report #265
Canova, Fabio and Jane Marrinan (1998): “Sources and Propagation of International
Output Cycles: Common Shocks or Transmission?” Journal of International
Economics, 46, 133-166.
Stockman, Alan C. and Linda L. Tesar (1995): "Tastes and Technology in a Two-
Country Model of the Business Cycle: Explaining International
Comovements". American Economic Review, 85:1 (March), 168-185.
* Baxter, Marianne (1995): "International Trade and Business Cycles". In: Gene M.
Grossman and Kenneth Rogoff (eds.): Handbook of International Economics,
Vol. III. Amsterdam: North Holland.

4. Nominal Exchange Rate Determination

4.1. Empirical Issues

* Mark (2001), ch. 4.

Mussa, Michael (1986): “Nominal Exchange Rate Regimes and the Behavior of Real
Exchange Rates”. Carnegie-Rochester Conference Series on Public Policy,
25, 117-214.
*Obstfeld–Rogoff , 8.1-8.3
*Bacchetta P. and E. van Wincoop, “Can Information Heterogeneity Explain
the Exchange Rate Determination Puzzle?”, American Economic Review, Jun
2006
Gourinchas P.O and and H. Rey, “International Financial Adjustment”,
revised version April 2006.
*Lucas R., "Interest Rates and Currency Prices in a Two-Country World",
Journal of Monetary Economics, 10, 335-59, 1982.
*Meese R. and K. Rogoff, “Empirical Exchange Rate Models of the Seventies”,
Journal of International Economics 14 3-24, 1983
*Mark, N. 1995. Exchange Rates and Fundamentals: Evidence on long-horizon
predictability. American Economic Review 85: 201-218.
Cheung Y-W., M. Chinn and A. Pascual, “Empirical Exchange Rate Models of
the Nineties: Are any Fit to Survive?”, mimeo UCSB, 2003
Duarte M. and A. Stockman, 2001. Rational Speculation and Exchange Rates,
NBER WP 8362.
*Evans M. and R. Lyons, “Order Flow and Exchange Rate Dynamics”, NBER
WP7317, and Journal of Political Economy
Gourinchas P. and A. Tornell, "Exchange Rate Puzzles and Distorted Beliefs,"
Journal of International Economics, December 2004
4.2. The Microstructure Approach to Exchange Rates

*Evans M. and R. Lyons, (2002) “Order Flow and Exchange Rate Dynamics”, Journal
of Political Economy
Lyons, The Microstructure Approach to Exchange Rates, MIT Press 2001.
*Evans M. and R. Lyons, (2006), “Meese-Rogoff Redux: Micro-Based Exchange Rate
Forecasting”, Forthcoming in the American Economic Review
Evans M. and R. Lyons, (2004), “A New Micro Model of Exchange Rate Dynamics”,
NBER Working Paper 10379.
Vitale, Paolo, (2004) “A Guided Tour of The Market Micro Structure Approach to
Exchange Rate Determination”, forthcoming, Journal of Economic Surveys

4.3. Flexible Price Models

Grilli, Vittorio and Nouriel Roubini (1992): “Liquidity and Exchange Rates”. Journal
of International Economics, 32, 339-352.
Lucas, Robert E. (1982): “Interest Rates and Currency Prices in a Two-Country
World”. Journal of Monetary Economics, 10, 335-360.
* Mark (2001), ch. 6.
* Obstfeld and Rogoff (1996), ch. 8.
Schlagenhauf, Don E. and Jeffrey M. Wrase (1995): “Liquidity and Real Activity in a
Simple Open Economy Model”. Journal of Monetary Economics, 35, 431-
461.
* Stockman, Alan C. (1980): “A Theory of Exchange Rate Determination”. Journal
of Political Economy, 88:4 (August), 673-698.

5. Real Exchange Rates

* Imbs J, H. Mumtaz, M. Ravn and H. Rey, “PPP Strikes Back: Aggregation and
the Real Exchange Rate”, QJE
• Chari, Kehoe, and McGrattan, “Can Sticky Price Models Generate Volatile and
Persistent Real Exchange Rates?," Review of Economic Studies, vol.69(3), pages
533-63.
*Obstfeld–Rogoff , ch. 4.
Backus D. and G. Smith, “Consumption and Real Exchange Rates in Dynamic
Economies with Nontraded Goods”, Journal of International Economics, 25,
1993.

6. New Open Economy Macroeconomic Models: Theory

*Obstfeld and Rogoff, “Exchange Rate Dynamics Redux,” Journal of Political

Economy 103, June 1995, 624-60.
*Lane, (1999). The New Open Economy Macroeconomics: A Survey., JIE.
*Obstfeld–Rogoff , ch. 10.
*Corsetti, (2007). “New Open Economy Macroeconomics”, New Palgrave Dictionary of
Economics, 2nd edition.
6.1 Producer Currency Pricing vs. Pricing-to-Market+Local Currency Pricing

Obstfeld and Rogoff, “New Directions for Stochastic Open Economy Models”, JIE
Betts and Devereux, (2000), "Exchange Rate Dynamics in a Model of Pricing-to-
Market", , Journal of International Economics 50: pp. 215-244.

7. Monetary Policy in a Small Open Economy

7.1 Monetary Policy in Open Economies

Devereux, Michael and Charles Engel (2003): “Monetary Policy in the Open
Economy Revisited: Exchange Rate Flexibility and Price Setting Behavior”.
Review of Economic Studies.
Lubik, Thomas A. and Frank Schorfheide (2003): “Do Central Banks Respond to
Exchange Rate Movements? A Structural Investigation”, JME.
* De Paoli, B., (2004), “Monetary Policy and Welfare in a Small Open Economy”
* Gali and Monacelli, Monetary Policy and Exchange Rate Volatility in a Small Open
Economy, RES.
* Clarida, Gali, Gertler, (2002), "A simple framework for international monetary policy
analysis," Journal of Monetary Economics, vol. 49(5), pages 879-904

7.2 Effects of Monetary Policy: VAR

* Clarida, Richard and Jordi Galí (1994): "Sources of Real Exchange Fluctuations:
How Important Are Nominal Shocks?" Carnegie-Rochester Conference
Series on Public Policy, 41, 1-56.
* Cushman David O., and Tao Zha (1997): “Identifying Monetary Policy in a Small
Open Economy under Flexible Exchange Rates”. Journal of Monetary
Economics, 39(3), 433-448.
* Eichenbaum, Martin and Charles L. Evans (1995): "Some Empirical Evidence on
the Effects of Shocks to Monetary Policy on Exchange Rates". Quarterly
Journal of Economics, 110:4, 975-1009.
Kim, Soyoung (2001): “International Transmission of U.S. Monetary Policy Shocks:
Evidence from VAR's”. Journal of Monetary Economics, 48(2), 339-372.
Rogers, John H. (1999): “Monetary Shocks and Real Exchange Rates”. Journal of
International Economics, 49(2), 269-288.

7.3 Monetary Policy in Emerging Markets

Taylor
Benigno and Ghironi

8. New Open Economy Macroeconomic Models: Empirical Issues

Bergin, Paul R. (2003): “Putting the ‘New Open Economy Macroeconomics’

Test”. Journal of International Economics. 60(1), pp. 3-34.
Lane, (1999). The New Open Economy Macroeconomics: A Survey., JIE.
Ghironi, (1999) Towards New Open Economy Macroeconometrics.
Lubik and Schorfheide (2005). A Bayesian Look at New Open Economy
Macroeconomics, NBER Macro Annual
Justiniano and Preston (2005). ...
Fuesta and Rabanal (2004). Euro-Dollar Real Exchange Rate Dynamics in an Estimated
Two-Country Model: What is Important and What is Not
Adolfson, et al

9. Globalization, Inflation, and Monetary Policy

Imbs et al
Razin
Rogoff
Rogoff
Bordo and Filardo

10. Heterogeneous Firms, Endogenous Trade, and Macro Dynamics

Bergin, Paul R. and Reuven Glick (2003): “A Theory of Endogenous Non-Tradability

and its Implications for Intertemporal Trade”. Mimeo, UC Davis.
*Ghironi F. and M. Melitz, “International Trade and Macroeconomic Dynamics
with Heterogeneous Firms,” Quarterly Journal of Economics, Aug 2005

11. Monetary Policy in a Currency Union: Empirical Issues in the Euro Area.

Angeloni, Ceccarelli, Inflation Differentials

Benigno

12. Sovereign Debt

*Obstfeld and Rogoff, Chapter 6;

Eaton ,J. and R. Fernandez, "Sovereign Debt", in Handbook of International
Economics, Gene Grossman and Ken Rogoff, ed, North Holland, 1995; also
NBER working paper 5131;
Bulow J. and K. Rogoff, "Sovereign Debt: is to forgive to forget", American
Economic Review Vol. 79, No. 1. (Mar., 1989), pp. 43-50