Trinity College, Department of Economics

Issues in International Finance

Prof. Miguel D. Ramirez

Econ. 331, Fall 2001

Required Text:  Set of Reading Materials (RM) prepared by the instructor and available at the economics office under my name.  I will also xerox additional reading materials and make them available throughout the term. You may also want to purchase Peter Isard's book entitled, Exchange Rate Economics. Cambridge, MA: Cambridge University Press, 1997.

General Comments

This seminar introduces students to important issues and recent developments in international finance. The first section introduces students to the workings of foreign exchange markets in highly integrated capital markets, the relationship between interest rates and exchange rates, the case for and against flexible exchange rate systems, and the impact of federal reserve policy on exchange rate volatility. Other issues and problems addressed are whether foreign exchange markets are efficient and to what extent, if any, do sterilized interventions move exchange rates in the desired direction. Section II focuses on the underlying reasons for the near-collapse of the ERM during 1992-93, and, in particular, examines the case of the British pound as a useful example of a speculative attack under conditions of free capital mobility and relatively easy access to foreign exchange reserves. In this connection, issues related to the timing of exchange rate realignments, the appropriateness of lifting (or imposing) capital controls, and the ability of member nations to coordinate their macroeconomic policies are analyzed. Section III turns its attention to the underlying economic and political causes of the Mexican peso crisis and the current Asian, Argentinean, Russian, and Turkish financial crises. It presents alternative explanations which contend that these crises, particularly the Mexican one, could have taken place even if their currencies were not overvalued and their pre-crisis monetary and fiscal policies were viewed as credible by market participants. This section also addresses the underlying economic conditions and political constraints that will determine whether the proposed EMU is sustainable in the long run. Again, issues related to the free mobility of capital, the feasibility of imposing capital controls, and the ability of member nations to coordinate their fiscal and monetary policies are analyzed. Section IV delves into the important and controversial question of whether the rapid integration of international commerce and finance (globalization) has been responsible for the growing economic divergence and rising income and wage inequality observed both between and within countries.  The last section analyzes and evaluates the economic impact of market-oriented reforms such as financial liberalization, both in developed and  developing nations. The discussion addresses important issues related to the proper sequencing, timing, and nature of financial reforms, and whether they are laying the groundwork for future economic growth and institutional development.

Throughout the course, a systematic effort will be made to examine major theoretical problems and policy issues via numerous real world examples and applications. By following this "real-world" approach, the seminar emphasizes the relevance of economic concepts, as well as their inherent limitations. At the very least, students should come away from this seminar with an understanding of the importance of legal, institutional, and political factors in constraining the economic decisions of workers, business firms, the government, and individual investors in an open economy setting.

 

Course Requirements

During the term you will be required to write short discussion papers on alternate weeks and a major term paper on a selected economic problem and/or issue pertaining to the international economy. Class participation will be encouraged via class discussion of the assigned material.

Course Grades

The weights attached to the components of your final grade are as follows:

                      Weights (%)       Dates

Discussion papers        40               TBA

Class participation      20               ---

Term paper               40              Dec. 7 (F)        

My office at Trinity is located in Williams Memorial Bldg, Rm. 312, and I will be available for consultation between 1:30 and 2:30 on Wednesdays and by appt. The office phone number is 297-2487 and my e-mail address is: Ramirez@mail.trincoll.edu. If you contact me either by phone or e-mail, please make sure it relates to a substantive problem and/or issue related to class material.

General Schedule

I.  Exchange Rate Regimes, Interest Rates, and Volatility (approx. 2 weeks).

RM:   Fischer and Little and Olivei articles; Friedman and McKinnon articles; Hakkio and Engel articles.

Isard, Peter. Exchange Rate Economics. Cambridge, MA: Cambridge University Press, 1997, Chps. 1 and 2.

Suggested Readings:

McKinnon, Ronald I., "Monetary and Exchange Rate Policies for International Financial Stability: A Proposal," Journal of Economic Perspectives, Vol. 2, No.1, Winter 1988, pp. 83-103.

Fischer, Stanley, "Exchange Rate Regimes: Is the Bipolar View Correct?" Journal of Economic Perspectives, Vol. 15, No. 2 (Spring 2001): 3-24.

Prasch, Robert F. "In Defense of a Tax on Foreign Exchange," Journal of Economic Issues, Vol. XXXII, No. 2 (June 1998): 325-331.

Tobin, James. "A Proposal for International Monetary Reform," Eastern Economic Journal, Vol. 4 (July-October 1978): 153-159.

II. Speculative Capital Flows, Exchange Rate Policies, and Dollarization (approx. 2 weeks).

RM: Mussa and Zurlinden articles; Frankel, Bonser-Neal, and Chang, and Velde and Veracierto articles

Isard, Chps. 4 and 5.

Suggested Readings:

Friedman, Milton. "The Case for Flexible Exchange Rates," In Essays in Positive Economics, edited by Milton Friedman. Chicago: University of Chicago Press, 1953.

Keynes, John Maynard. The General Theory of Employment, Interest, and Money. New York: Harcourt, Brace, Jovanovich Publishers, 1964 (originally, 1936), Chp. 12.

Quinn, Stephen F. and John T. Harvey."Specularion and the Dollar in the 1980s,"Journal of Economic Issues, Vol. XXXII, No. 2 (June 1998): 315-323.

III. Financial Crises and the Prospects for the EMU (approx. 3 weeks).

RM:  Espinosa and Russell articles; Goldstein and Marshall articles; Mishkin,  Rogoff  and Krugman articles; Klein, Feldstein and Wynne articles.

Suggested Readings:

Feldstein, Martin. "The Political Economy of European Economic and Monetary Union," Journal of Economic Perspectives, Vol. 11, No. 4 (Fall 1997): 23-42.

Obstfeld, Maurice. "Europe's Gamble," Bookings Papers on Economic Activity, No. 2, 1997, pp. 241-300.

Mishkin, Frederic S., "Global Financail Instability: Framework, Events, Issues," Journal of Economic Perspectives, Vol. 13, No.4, Fall 1999, pp. 3-20.

Mundell, Robert A., "A Theory of Optimal Currency Areas," American Economic Review, September 1961, Vol. 50, pp. 657-665.

Wyplosz, Charles. "EMU: Why and How It Might Happen," Journal of Economic Perspectives, Vol. 11, No. 4 (Fall 1997): 3-21.

IV. Globalization and Inequality (approx. three weeks).

  RM: Rodrik, Scott,  Fieleke, and Burfisher articles.

Suggested Readings:

Krugman, Paul, "Can America Stay on Top?" Journal of Economic Perspectives, Vol. 14,  No.1, Winter 2000, pp. 169-176.

Krugman, Paul. "Growing World Trade and Consequences," Bookings Papers on Economic Activity, Vol. 1, 1995, pp. 327-77.

Mazur, Jay, "Labor's New Internationalism," Foreign Affairs, Vo. 79,  No.1, January/February 2000, pp. 79-93.

Rodrik, Dani, "How Far Will International Economic Integration Go?" Journal of Economic Perspectives, Vol. 14, No.1, Winter 2000, pp. 177-186.

Rodrik, Dani. Has Globalization Gone Too Far? Washington, DC: Institute for International Economics, 1997.

Wood, Adrian. "How Trade Hurt Unskilled Workers," Journal of Economic Perspectives, Vol. 9, No. 3, 1995: 57-80.

V. Financial Liberalization, Capital Controls, and Economic Adjustment in Developing Nations (approx. 1 and 1/2 week).

RM:  Cooper, S. Edwards, and F.Edwards articles.

Isard, chp. 12.

Suggested Readings:

Agosin, Manuel R. and Ricardo Ffrench-Davis. "Managing Capital Inflows in Latin America," In The Tobin Tax: Coping With Financial Volatility, edited by Mahbub ul Haq, Inge Kaul, and Isabelle Grunberg. New York: Oxford University Press, 1996, pp. 161-192.

Edwards, Franklin R., "Hedge Funds and the Collapse of Long-Term Capital Management," Journal of Economic Perspectives, Vol. 13, No. 2 (Spring 1999), pp. 189-210.

Edwards, Sebastian, "How Effective are Capital Controls," Journal of Economic Perspectives, Vol. 13, No. 4, Fall 1999, pp.65-84.

Mahon, Jr., James E. Mobile Capital and Latin American Development. University Park: The Pennsylvannia State University Press, 1996, Chps. 1, 2, and 5.

Rodrik, Dani, The New Global Economy and Developing Countries: Making Openness Work. Washington, D.C.: The Johns Hopkins University Press, 1999, chs. 3 and 4.