McGill University Department of Economics ECON 424 International Payments Winter Semester 2017 This syllabus contains all information, policies and procedures. Please read it carefully! 1. Instructor Instructor: Taweewan Sidthidet Office: Leacock Building Rm#315 Email: 2017econ424@gmail.com (only for submitting paper proposal, presentation for critique, and final term paper) Email: taweewan.sidthidet@mcgill.ca Office hours: Mondays: 10.15am 12.00pm and by appointment. 2. General Information Prerequisites: ECON 230D1/D2 or 250D1/D2 Co-requisites: ECON 330D1 or 352D1 Class time: Mondays and Wednesdays; 8.35am 9.55am Class room: BURN 1B36 Class start end: Jan 4 April 10, 2017 Reading week: Feb 27 March 3, 2017 The final exam date: TBA 3. McGill Policy Statements 3.1 McGill University values academic integrity. Therefore, all students must understand the meaning and consequences of cheating, plagiarism and other academic offences under the Code of Student Conduct and Disciplinary Procedures (see www.mcgill.ca/students/srr/honest/ for more information). 3.2 In accord with McGill University s Charter of Students Rights, students in this course have the right to submit in English or in French any written work that is to be graded. 1
4. Tutorial and TA Information TA: TBA TA office hours: TBA The Teaching Assistant will conduct review sessions and office hours. There will be two review sessions scheduled during the term with one held midway through the course and another just before the final exam. Times and locations for these sessions will be announced in due course. You can also contact her for any clarifications about the course during her office hours. 5. Textbooks The recommended textbook for this course is International Finance: Theory & Policy by Paul R. Krugman, Maurice Obstfeld, and Marc J. Melitz (10 th edition, 2015) (KOM). The above textbook is based on International Economics: Theory and Policy by Paul R. Krugman, Maurice Obstfeld, and Marc J. Melitz (9 th edition, 2012). (In library: HF1359 K78 2012) There are also other good books available from McGill Library and that cover some of the material that we will discuss in the class. Examples include: (RM) Dunn, Robert M. & John H. Mutti, H. J. (2009). International Economics. Routledge (In library: HF1359 D862 2009). (OR) Obstfeld, M. and Rogoff, R. (1996). Foundations of International Macroeconomics. MIT Press (Advanced level) (In library: HF1359 O27 1996). I will also suggest a few journal articles that would be available on Mycourses. Some of them are already listed in the course content below, but some others will be included as the course progresses. 6. Course Description This is a course on open-economy macroeconomics (also known as international finance). International finance is concerned with the monetary and macroeconomic relations between countries. It is a continuously evolving issue that deals very much with real world situations such as debt crisis, balance of payments problems and policy, the fluctuations of exchange rate and the implications of macroeconomic linkages between economies. The first part of the course will lay out many useful theories and essential background in explaining the movements of macroeconomic variables such as the components of balance of payments, money, the exchange rate, inflation and national income. The second part will help you to assemble and understand these theories into an overall analytical framework. Finally, we will apply this analytical framework to certain real-world situations. 2
7. Evaluation Scheme Your final grade in this course will be based on the following criteria: 1. Term paper + presentation (in groups) 22% 2% proposal 5% presentation 15% paper 2. Critique (in groups) 3% 3. Assignments (in groups) 15% 4. Final exam (individual) 60% All group works must be done in groups of 5. 8. Term paper: There are 2 options for writing a term paper. They are as follows: 1. Review of existing literature: related to the course content from well-known journals (at least 3 articles), e.g., American Economic Journal, Journal of Political Economy, Journal of International Economics, NBER. The articles can be either theoretical or empirical in nature. For example, you might review 3 4 articles related to a certain theory in the course and explain their similarities/differences. 2. Analysis of a topic: related to the course, decide on some research questions (3-4 questions) and answer them. You might setup your own model to test your questions, e.g., the relationship between interest rates and exchange rates by using statistical analysis, or macroeconomic policy of a particular country. You might use theories in this course (or others that you have taken) to analyze your topic. For both options, you need to first submit me a 1-page proposal. For the first option, it would be the list of papers that you will be reviewing and brief explanation about how they are related. For the second option it would be the topic, why it is important and the list of the questions that you would address. You can proceed with the paper once I approve the proposal. If you do not submit the term paper proposal by the due date, you might receive a 2-point deduction. See the examples of term paper proposal in Section 9. The due date for submitting the proposal (by EMAIL to 2017econ424@gmail.com): January 28 th 2017 at 6pm. The final term paper must be typed (at least 1.5 spaced) and not more than 10 pages in length (not including the appendix, if any). See the format of final term paper in Section 12. The due date for submitting the final paper: Monday 10th April 2017 by 12pm (Both a hard copy and pdf file via email 2017econ424@gmail.com). 3
9. Term Paper Proposal (To be submitted through email: 2017econ424@gmail.com; Due date: January 28th, 2017) Example 1: Literature review 1. Topic: The Effectiveness of the Bank of Japan s Monetary Policies on Japan s Economic Recovery through Certain Key Macroeconomic Indicators 2. Introduction/ Background/ Motivation/ Significance: Our term paper will be in the format of a literature review. We will look at the effectiveness of the Bank of Japan s monetary policies on Japan s economic recovery through certain key macroeconomic indicators. The following articles contain interesting empirical data that touch on various transmission channels through which the policies are reflected, such as interest rate movement, monetary base expansion, and price stability. 3. Articles Bowman, D., Cai, F., Davies, S., & Kamin, S. (2011). Quantitative easing and bank lending: evidence from Japan. Board of Governors of the Federal Reserve System. Kurihara, Y. (2006). The relationship between exchange rate and stock prices during the quantitative easing policy in Japan. International Journal of Business, 11(4), 375. Shiratsuka, S. (2010). Size and composition of the central bank balance sheet: Revisiting Japan s experience of the quantitative easing policy. Monetary and Economic Studies, 28(3), 79-105. Wieland, V. (2009). Quantitative easing: a rationale and some evidence from Japan (No. w15565). National Bureau of Economic Research. 4. Names and IDs of Group Members Name.. ID#... 4
Example 2: Analysis of a topic 1. Topic: International Monetary System: Post World War II 2. Introduction/ Background/ Motivation/ Significance: Throughout history, the world economy had several evolutions regarding its international monetary systems. We chose to focus on the changes that happened after World War II because of the tremendous impact and changes that it has brought to the economy. Each individual system has its own advantages and disadvantages when it comes to satisfying the open economy trilemma. The Bretton Woods system also led to the creation of the International Monetary Fund and the World Bank. These institutions have gained significant importance over the last decade and its policies were used as a benchmark during economic crises. An insight on these changes would help us understand why these transitions were necessary as well as the economic, political, and social factors that each system addresses. 3. Questions: 4. References Q1. What led to the eventual discontinued use of the Gold Standard and would there be reasons to bring back this traditional system into our current international monetary system? Q2. What led to the adoption of the Bretton Woods system and how does it compare to the gold standard? What are its advantages and disadvantages? Q3. What followed the Bretton Woods era and why was it considered superior to its predecessors? Discuss this using the theories from the open economy trilemma. Bayoumi, T., & Eichengreen, B. (1995). The stability of the gold standard and the evolution of the international monetary system. Bordo, M. D. (1993). The Bretton Woods international monetary system: a historical overview. In A retrospective on the Bretton Woods system: Lessons for international monetary reform (pp. 3-108). University of Chicago Press. Eichengreen, B., & Capital, G. (1995). A history of the International Monetary System. University of California at Berkeley. 5. Names and IDs of Group Members Name.. ID#... 5
10. Class presentation: You will also have to present your term paper in the class. We will start the presentations from Monday 13 th February 2017. Each group will have (Max.) 10 minutes available to deliver a presentation. The group needs to submit the presentation by 4pm two days before the presentation by email to me so that I can send it to the critique group (see below). Note that the presenting group must prepare for a 4-5 minutes critique by another group as well as questions from other individuals. The following criteria that will be used to evaluate your presentations: Content & Analysis, Recommendations, Justification, Timeliness, Response to Questions/Critique, Overall Impact of the Presentation and other Comments. 11. Presentation Critique: The intention for this is to set the stage for bringing forward new perspectives and substantiating points that need more emphasis. One group will be assigned by me for each presentation as the critique group. The group needs to ask questions/provide comments to the presenting group based on their reading/understanding of the presentation done. There will be a time limit of around 4-5 minutes (max) for this critique. Although this is a group critique, the performance will be gauged based on active participation from all the members of group. Other scoring points include relevance of the questions/comments, clarity of thought, ability to link comments and the concepts learnt in class, novelty of the idea compared to what was presented and comprehensiveness of the critique. Keep in mind that an ideal critical assessment should involve pointing out both the strengths and weaknesses of the analysis. I will send the presentation to be critiqued 2 days before so that you get a good idea about what the group is presenting. Note that the schedules for presentations and critiques will be decided by me around the end of January. 6
12. Format for the Final Term Paper The following guidelines are for your use in structuring your paper. The paper should be composed of five sections: 1) Introduction: Overview/Background information 2A) Literature review if your group selects Option 1 2B) Research Questions and Analysis if your group selects Option 2 3) Summary and recommendations (if any) If you select Option 1, please summarize your selected articles, comparing the differences and/or similarities of these articles as well as your opinion about the articles. If you select Option 2, please summarize your analysis. 4) Limitations and Assumptions (if any) 5) References Restrict the report to no more than 10 pages typewritten, using default margin and 12-point type, at least 1.5 spacing. Summary tables in the text are encouraged for quantitative information/comparison. In addition to the analysis, you may supply any data or figures that you feel are necessary in the appendix (not more than 3 pages long). Note that you need to properly cite your references both in-text and the end of the document. For proper in-text citations and reference list, please follow APA (American Psychological Association) citation style from this website: https://www.mcgill.ca/library/services/citation/guides-0. Due date for the Final Term Paper: April 10 th, 2017 at 12pm. One report per group in both a hardcopy format (in my office) and a PDF file format (by email: 2017econ424@gmail.com). 13. Assignments (15%) There will be two problem set assignments to be done in groups during the course, each worth 7.5% of the total marks. All assignment submissions are required to be in a HARDCOPY format. You can submit the assignment either in the class or at my office on the deadline indicated. The submission deadlines for the assignments will be announced in the class. 7
14. Exam (60%) For this course, there will be only one final exam. The best way to study for this exam is to study the lecture notes first. Then, look at the readings to help clarify anything that seems unclear from the lectures. The exam will be closed book/notes and will cover all the material in the lectures notes. 15. Tentative Course Schedule Although no attendance will be taken, students who expect to miss more than the occasional lecture are cautioned against taking the course. Lecture notes prepared by the instructor will be uploaded in mycourses weekly, before each class. You are expected to visit the site regularly, download and preview the materials before you come to the classes. In order to make sure that you will not miss any topics for the exams, please closely follow the topics of each chapter in my slides. There might be extra articles related to the topics. I will cite it in the lecture slides. Note that the schedule below is not rigid and may require minor modifications as the course progresses. We should always be within one week of the indicated material. Note that the highlighted readings for each chapter are recommended (in addition to the lecture notes). The other readings are only suggested, although some of them might be later on included in the syllabus for the final exam. 8
1. Introduction Readings: 1.1 Course Overview 1.2 Introduction Chapter 1: Introduction (KOM) PART I: Exchange Rates and Open-Economy Macroeconomics 2. Balance of Payments Readings: 2.1 National Income Accounting in an Open Economy 2.2 Balance of Payments Accounts 2.3 Savings, Investment, and Current Account Chapter 2: National Income Accounting and the Balance of Payments (KOM) Balance of Payments. (2009). Federal Reserve Bank of New York. Retrieved from www.newyorkfed.org/aboutthefed/fedpoint/fed40.html. Bernanke, B.S. (2005, April 14). The Global Saving Glut and the U.S. Current Account. The Homer Jones Lecture, St. Louis, Missouri. Coughlin, C. C., Pakko, M. R., & Poole, W. (2006). How dangerous is the US current account deficit?. The Regional Economist, (Apr), 4-9. In Defence of Deficits. (1995, December 16). The Economist. Retrieved from http://www.economist.com/node/1192129. The Price of Profligacy. (2003, September 18). The Economist. Retrieved from http://www.economist.com/node/2050732. 3. Exchange Rates Readings: 3.1 Foreign Exchange Market 3.2 Equilibrium in Foreign Exchange Market and the Interest Parity Condition 3.3 Asset Approach to Exchange Rate 3.4 Money and Foreign Exchange Markets Chapter 3: Exchange Rates and the Foreign Exchange Market: An Asset Approach (KOM) Chapter 4: Money, Interest Rates, and Exchange Rates (KOM) Better than Guesswork?. (1999, November 28). the Economist. Retrieved from http://www.economist.com/node/254457. 9
4. The Exchange Rate in the Long Run Readings: 4.1 Purchasing Power Parity 4.2 Real Exchange Rate Chapter 5: Price Levels and the Exchange Rate in the Long Run (KOM) Devereux, M. B. (1997). Real exchange rates and macroeconomics: evidence and theory. Canadian Journal of Economics, 773-808. Hakkio, C. S. (1992). Is purchasing power parity a useful guide to the dollar?. Economic Review-Federal Reserve Bank of Kansas City, 77(3), 37. Kasa, Kenneth. (1995, June 9) Understanding Trend in Foreign Exchange Rates. FRBSF Economic Letter, Federal Reserve Bank of San Francisco. Rogoff, K. (1996). The purchasing power parity puzzle. Journal of Economic literature, 34(2), 647-668. Taylor, A. M., & Taylor, M. P. (2004). The purchasing power parity debate. The Journal of Economic Perspectives, 18(4), 135-158. 5. The Exchange Rate in the Short Run Readings: 5.1 Aggregate Demand in an Open Economy 5.2 Impacts of Macroeconomic Policies on the Exchange Rate 5.3 Relationship among Macroeconomic Policies, the Current Account Balance, and the Exchange Rate Chapter 6: Output and the Exchange Rate in the Short Run (KOM) Bailliu, J. & Bouakez, H. (2004). Exchange rate pass-through in industrialized countries. Bank of Canada Review, 2004(Spring), 19-28. Dornbusch, R. & Krugman, P. (1976). Flexible Exchange Rates in the Short Run. Brookings Papers on Economic Activity 3, 537-575. Obstfeld, M. & Rogoff K. (2009). Global Imbalances and the Financial Crisis: Products of Common Causes. The conference volume of Federal Reserve Bank of San Francisco, Asia and the Global Financial Crisis, San Francisco, 131-172. 6. Intertemporal Trade and the Current Account Readings: Chapter 1: Intertemporal Trade and the Current Account Balance (OR) (Sections: 1.1.1, 1.1.2, 1.1.3, 1.1.4, 1.1.6, 1.2.1, 1.2.2, 1.2.3) Anatomy of Thrift. (2005, September 22). The Economist. Retrieved from http://www.economist.com/node/4418414. 10
7. Exchange Rate Regimes Readings: 7.1 How Central Banks Intervene in the Foreign Exchange Market to Fix Exchange Rates 7.2 How Macroeconomic Policies Work When Exchange Rates are Fixed 7.3 Balance of Payment Crisis Chapter 7: Fixed Exchange Rates and Foreign Exchange Intervention (KOM) Kaminsky, G. L., & Reinhart, C. M. (1999). The twin crises: the causes of banking and balance-of-payments problems. American economic review, 473-500. PART II: International Macroeconomic Policy 8. The International Monetary System Readings: 8.1 Macroeconomic Policy Goals in an Open Economy 8.2 Policy Trilemma for Open Economies 8.3 International Macroeconomic Policy under the Gold Standard, the Bretton Woods System and the International Monetary Fund 8.4 Macroeconomic Policy Coordination 8.5 Gains from International Capital Mobility Chapter 8: International Monetary Systems: Historical Overview (KOM) Chapter 9: Financial Globalization: Opportunity and Crisis (KOM) Chapter 11: Developing Countries: Growth, Crisis, and Reform (KOM) Feldstein, M. S. (1988). Distinguished lecture on economics in government: thinking about international economic coordination. The Journal of Economic Perspectives, 2(2), 3-13. Horns of a Trilemma. (2013, August 31). The Economist. Retrieved from http://www.economist.com/news/finance-and-economics/21584351-how-can-emergingeconomies-protect-themselves-rich-worlds-monetary. Lucas, R. E. (1990). Why doesn't capital flow from rich to poor countries?. The American Economic Review, 80(2), 92-96. 11
16. Peer evaluation Peer evaluation form is for you to use individually if you want to evaluate the participation of the members of your group during the term project and assignments. Note that submitting the peer evaluation form is not compulsory. If at least half of the members of a group submit their forms, I will use the feedback during the final marking of the term project and assignments for individual group members. If less than half of your group members submit their forms, all your group members will get the same marks. 12
Peer Evaluation Form Evaluator s Name ID# Project: Assignment 1 DATE Submitted: April 10, 2017 Scale 0 3: Please rate each group member s participation, including yourself 1 = Minimal participation 0 = No participation (0%) 1. 2. 3. 4. 5. 6. Comment: (30%) Team member name 2 = Kind of participation (60%) 3 = Active participation (100%) Rating 13
Peer Evaluation Form Evaluator s Name ID# Project: Assignment 2 DATE Submitted: April 10, 2017 Scale 0 3: Please rate each group member s participation, including yourself 1 = Minimal participation 0 = No participation (0%) 1. 2. 3. 4. 5. 6. Comment: (30%) Team member name 2 = Kind of participation (60%) 3 = Active participation (100%) Rating 14
Peer Evaluation Form Evaluator s Name ID# Project: Term Paper DATE Submitted: April 10, 2017 Scale 0 3: Please rate each group member s participation, including yourself 1 = Minimal participation 0 = No participation (0%) 1. 2. 3. 4. 5. 6. Comment: (30%) Team member name 2 = Kind of participation (60%) 3 = Active participation (100%) Rating 15
Peer Evaluation Form Evaluator s Name ID# Project: Presentation Critique DATE Submitted: April 10, 2017 Scale 0 3: Please rate each group member s participation, including yourself 1 = Minimal participation 0 = No participation (0%) 1. 2. 3. 4. 5. 6. Comment: (30%) Team member name 2 = Kind of participation (60%) 3 = Active participation (100%) Rating 16