Macroeconomics of the Open Economy 2400-PP2MGOa
The course starts with an analysis of the structure of balance of payments, its interdependence with other macroeconomic categories, and a reminder of the national income accounting rules in an open economy.
Then a review of theories addressing the problem of determinants of balance of payments is made. This review opens with the classical model. Particular emphasis is placed on the relationship between categories of savings, investment and current account balances. In the remainder of the course, other approaches are discussed, including elasticity approach, monetary approach and multiplier approach.
The subject of the next part of this course is the foreign exchange market, its institutions and transactions. One of the discussed issues is the exchange rate exposure and the possibility of hedging against it. Then determinants of exchange rate are discussed: in the short run (interest rate parity) and long run (purchasing power parity, the effect of Balassa – Samuelson, monetary model). Overview of the theories of exchange rate is completed with the overshooting model by Dornbusch.
The fourth major thematic area consists of issues related to the macroeconomic policy in an open economy. They are analyzed using model ISLMBP at different assumptions about the exchange rate regime and the degree of international capital mobility. The problem of currency crises is an extension of this discussion. The course discusses not only different theoretical approaches crises but also refers to empirical examples from the history of world financial system.
The fifth thematic area is a monetary union, both in theoretical aspect (the theory of optimum currency areas) and in empirical perspective (European experience in this field).
Classes closes with discussion of the history and the present day of the international monetary system.
The student acquires the following elements of knowledge, skills and attitudes:
- knowledge of the structure of the balance of payments and national income accounting in an open economy,
- knowledge of the assumptions and predictions of the intertemporal model of the balance of payments,
- understanding of the mechanisms of functioning, actors and the transactions in the international foreign exchange market,
- understanding of foreign exchange exposure and hedging against it,
- understanding of the determinants of exchange rates in the short (interest rate parity) and long run (purchasing power parity, monetary approach),
- understanding the mechanism of Balassa-Samuelson effect,
- understanding of the concept of real exchange rate and its determinants,
- knowledge of the exchange rate overshooting model,
- knowledge of the Keynesian (multiplier) approach to the balance of payments with fixed and floating exchange rate regimes,
- knowledge of assumptions and prediction of the ISLMBP model with the analysis of economic policy with different assumptions regarding exchange rate regime and capital mobility,
- knowledge of major theories explaining currency crises,
- knowledge of the theory of optimal currency area and the historical and institutional setting of the EMU,
- knowledge of the rules and institutional settings of the international monetary system in a historical and contemporary perspective,
- simple examples of transactions recorded in a country's balance of payments,
- interpretation of the imbalances in the balance of payments and its links with other macroeconomic categories, particularly in the light of the classical model and the intertemporal approach,
- determination of the nature of exchange rate exposure and construction of simple strategies to hedge against it,
- ability to predict changes of exchange rates in light of short- and long run theories,
- ability to calculate and interpret the changes in real exchange rate,
- ability to conclude on the effectiveness of policies aimed at improvement of the current account balance through the devaluation of national currency,
- ability to draw conclusions concerning the effects of economic events (shocks) and macroeconomic policies for short-term macroeconomic equilibrium, depending on the exchange rate regime and the degree of capital mobility,
- more self-reliance in application of the theoretical knowledge to the analysis of basic open-economy macroeconomic phenomena, through the use of empirical examples, referring to the sources of macroeconomic data, etc.,
- attainment of the higher level of responsibility and self-control by not being formally required to attend the lectures,
- improvement of his/her work organization as a result of requirements imposed during discussions’ classes,
- development of more interest for issues related to macroeconomics of open economy,
- improvement in terms of reliability and honesty through rigorous enforcement of the examination requirements for getting a credit.
KK03, KW01, KW02, KU01, KK01, KK02, KK03
The course ends with a written examination (open questions). In order to be allowed to write an exam, it is necessary to get a credit for discussion classes. Credit for the final exam will be given to the students that will obtain at least half of the points, while the final grade for the course will be based on the weighted average of points obtained from the discussion classes (with a weight of 20%) and examination (weight 80%).
Literature (compulsory: chapters indicated in a sylabus):
[CFJ]: Caves R., Frankel J., Jones R., World Trade and Payments, Pearson Addison Wesley, 10th edition, 2006;
[dG]: De Grauwe P., Economics of Monetary Union, OUP Oxford, 2009;
[E]: Eiteman D., Stonehill A., Moffett M., Multinational Business Finance, Pearsons, 12 th edition, 2009;
[G]: Gandolfo G., International Finance and Open-Economy Macroeconomics, Spriger 2002; [KO]: Krugman P., Obstefld M., International Economics, Theory and Practice, Pearson Addison Wesley, 7th edition, 2008;
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