ECON 356 Study Guide - Summer 2018, Comprehensive Midterm Notes - International Law, Interest Rate, Variance
ECON 356
MIDTERM EXAM
STUDY GUIDE
Fall 2018
Department of Economics
UNIVERSITY OF BRITISH COLUMBIA
ECON 356
Introduction to International Finance
July 2018 G. Newman
Iona 153
Content: This course provides an introduction to the theory of international finance,
including the topic of international financial ‘crisis.’ It serves as a basic foundation for
the more advanced course, Econ 456. While technically simpler, it probably has a greater
focus on current global business and market events.
Teaching Method: Since textbooks are seldom up-to-date and are unnecessarily
expensive, we do not have a required text. For contemporary happenings and for the
articulation of basic concepts, it makes more sense to rely on the vast quantity of business
postings on the web, and other bits and pieces. Many basic concepts are articulated on
sites such as www.investopedia.com. At the same time, most of the models taught have
my ‘own’ input and go beyond the treatments in texts. There will be some informal notes
on Connect – but sufficiently ‘informal’ that you will always want to come to class. I
will mail you other things. This is not a memorization-based course: it is about logic and
analysis. It is designed to challenge your ability to integrate and interpret a large variety
of forces that may operate in any given situation. The key to exam performance lies in
answering ‘questions’ that I will mail you on each section of the course. I encourage you
to form study groups early.
Topics: The main body of the course covers the theory of short (and long) run
movements in the balance of payments and in exchange rates. It also examines the
differences between fixed and flexible exchange rate regimes, and the determinants of
capital flows between countries. Three different types of generic models are studied and
are compared as to their implications.
1. A common currency model of the balance of payments with intertemporal structure;
current and future income shocks; small country, large country and global shocks.
Two theorems of fixed rate systems: no monetary autonomy and no insulation from
large country shocks’. Country-specific and global risk.
2. A classical ‘gold standard’ model: deficits, surpluses and gold flows, fixed and
flexible exchange rates; the role of the ‘gold reserve’ and sterilization. ‘Devaluation’.
Long-run purchasing power parity and the real exchange rate. Movements in nominal
vs. real exchange rate: excess volatility of exchange rates; exchange rate ‘disconnect’.
3. The pure theory of covered interest parity in riskless markets with flexible exchange
rates, role of expectations in resolving short- run empirical problems.
find more resources at oneclass.com
find more resources at oneclass.com
4. The short run, fixed price, model of adjustment: the link between the money supply
shocks and real shocks -- and the interest rate. Cases of fixed and flexible exchange
rates. Sterilized and non-sterilized intervention, exchange rate overshooting; fixed
and flexible exchange rates cases considered.
5. Linking short-run exchange rates to central bank overnight rate decisions: policy
targets and real and nominal random shocks; expected inflation and expected output:
Clarida, et al (1999).
6. The trilemma of the open economy: achieving fixed exchange rates, capital mobility
and independent monetary policy.
7. Arguments for the fixity and flexibility of exchange rates; shock correlation;
transaction costs, exchange risk.
The final part of the course studies the foundations of financial crises, starting with a
brief discussion of the decay of the Bretton Woods system, through the subsequent debt
crisis of the 80’s, up to the crises in emerging markets in the late 90’s (Mexico and the
Asian crisis). A basic objective is to identify factors that lie behind the Asian financial
crises and to examine a possible relationship between ‘banking crises’ and ‘exchange
crises’ – ‘the twin crises’. An important concern here is modeling ‘capital flight’ and the
role for ‘capital mobility’ and ‘moral hazard’ in creating and extending situations of
financial crisis and contagion, and limiting the role for institutions such as the IMF. An
underlying them is that Globalization need not raise welfare. Ingredients of this model
will also be used briefly to understand our recent global financial crisis and its differences
from the Asian crisis.
Important Articles following the Asian Financial Crisis
*Obstfeld, Maurice, ‘The Global Capital Market: Benefactor or Menace’, Journal of
Economic Perspectives (JEP), 12, Fall 1998, 9-30.
*Mishkin, Frederic, ‘Global Financial Instability: Framework, Events, Issues,’ JEP, 13,
Fall 1999, 3-20.
Rogoff, Kenneth, ‘International Institutions for Reducing Global Financial Instability’,
JEP, 13, Fall 1999, 21-42.
Kaminsky, G. and C. Reinhart, ‘The Twin Crises: the Causes of Banking and Balance of
Payment Problems’, AER, June 1999, 473-500.
______________________ and C. Vegh, ‘The Unholy Trinity of Financial Contagion’
JEP, 17, Fall 2003, 51-74.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Content: this course provides an introduction to the theory of international finance, including the topic of international financial crisis. " it serves as a basic foundation for the more advanced course, econ 456. While technically simpler, it probably has a greater focus on current global business and market events. Teaching method: since textbooks are seldom up-to-date and are unnecessarily expensive, we do not have a required text. For contemporary happenings and for the articulation of basic concepts, it makes more sense to rely on the vast quantity of business postings on the web, and other bits and pieces. Many basic concepts are articulated on sites such as www. investopedia. com. At the same time, most of the models taught have my own" input and go beyond the treatments in texts. There will be some informal notes on connect but sufficiently informal" that you will always want to come to class. This is not a memorization-based course: it is about logic and analysis.
