Makroeconomics of the Open Economy 2400-EM2MGO
1. Balance of payments.
The balance of payments structure, double-entry system, basic identities of the balance of payments. Balance of payments equilibrium and the international investment position.
2. Classical model of the open economy
Investment and savings in an open economy and the current account. Impact of the economic policy and the world interest rate changes on the current account and real exchange rate. Twin deficits hypothesis and Feldstein-Horioka puzzle.
3. Intertemporal approach to current account and international capital flows.
Intertemporal consumption and production optimalization and the current account, neoclassical theory of capital flows, cost and benefits of international capital flows, Lucas paradox and global imbalances.
4. Exchange rates and foreign Exchange market
Exchange rate definitions, participants of the foreign exchange market and transactions. Basic instruments, hedging and arbitrage conditions
5. Exchange rate determination in the short run
Interest rate parities and arbitrage, money market equilibrium and exchange rates, the role of expectations and risk.
6. Exchange rate determination in the long run, part I.
Law of one price and purchasing power parity (relative and absolute), long run real equilibrium exchange rate determinants, productivity changes and Balassa-Samuelson effect
7. Exchange rate determination in the long run, part II.
Exchange rate monetary models: monetarist and Dornbusch overshooting model, the monetarist model of balance of payments and devaluation effectiveness
8. Exchange rate policy, part I.
Exchange rate regimes, sterilized and non-sterilized official interventions, interventions’ mechanisms and their effectiveness, the role of asset substitutability
9. Exchange rate policy, part II.
Credibility of exchange rate Policy, Krugman’s target zone model, currency crises models. De jure and de facto exchange rate regimes and „fear of floating” phenomenon.
10. Elasticity approach to the balance of payments – Marshall-Lerner condition.
Exchange rate changes and the current account. Marshall-Lerner condition. The “J-curve” effect. Stability of the foreign exchange market.
11. Multiplier approach to the balance of payments. External and internal equilibrium.
Keynesian approach to balance of payments. Propagation of international shocks under various exchange rate regimes. Swan diagram – external and internal equilibrium problem.
12 Macroeconomic policy in the open economy in the short run
Mundell – Fleming model and the effectiveness of the monetary and fiscal policies depending on capital mobility and exchange rate regime.
13 International monetarny system evolution.
Gold standard, Bretton Woods system and its collapse, the floating exchange rates system. The coordination of macroeconomic policies problem
14 Global capital market.
International monetary system evolution and the capital mobility changes, costs and benefits of financial markets’ internalization, risk aversion and international portfolio diversification, foreign exchange rate efficiency.
Type of course
Upon the course completion the student:
-is able to recognize:
o The structure of balance of payments
o The main macroeconomic linkages in an open economy;
o Long and short run adjustments mechanisms in an open economy
-is able to:
o forecast the impact of economic policy changes on the exchange rate;
o provide an explanation of international capital flows;
o analyze short and long run determinants of exchange rate;
o point out the conditions of economic stability
KW01, KW02, KW03, KU01, KU02, KU03, KU04
The lecture ends up with a written exam in the form of open questions. Sine qua non condition for attempting exam is to have a credit on discussions classes. The exam is passed with the score of 50% or more points available during the exam. The final grade is given upon a weighted average of the score from the exam (with weight of 70%) and the points obtained during discussions classes (with weight of 30%).
Please enlist readings inexpedient for the obtainment of the course credit, distinguishing required from suggested readings, if any are recommended (if the course ends with an exam, the indicated readings constitute the required readings for the exam).
Information on level of this course, year of study and semester when the course unit is delivered, types and amount of class hours - can be found in course structure diagrams of apropriate study programmes. This course is related to the following study programmes:
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