International Macroeconomics

Cover

Preface

Motivation

On the Second Edition

Audience

Other Textbooks

Acknowledgements

Contents

I Introduction

I.1 Motivation

I.2 International Macroeconomics in Times of Crises

I.3 Overview

I.4 A User's Manual

II The Balance of Payments

II.1 Definitions and Rules

II.1.1 Overview

II.1.2 The Current Account

II.1.3 The Capital Account

II.1.4 The Financial Account

II.1.5 Balance of Payments Equilibrium

II.1.6 Net Errors and Omis

II.2 Some Important Balance-of-Payments Relationships

II.2.1 The Balance of Payments and the Net International Investment Position

II.2.2 Valuation Effects

II.2.3 The Dynamics of the Net International Investment Position

II.2.4 Gross Domestic Product, Gross National Income, and the Current Account

II.2.5 Savings, Investment, and the Current Account

II.3 Summary and Outlook

II.4 Keywords

II.5 Literature

II.6 Exercises

III The Basic Model of Intertemporal Trade

III.1 Introduction and Overview

III.2 Consumption, Savings, and the Current Account in a Small Open Economy with an Exogenous Income

III.2.1 Model Structure and Assumptions

III.2.2 The Intertemporal Budget Constraint

III.2.3 The Objective Function

III.2.4 The Optimal Consumption Path

III.2.5 The Current Account

III.2.6 Comparative-Static Analysis

III.2.7 Gains from Intertemporal Trade

III.3 The Current Account in a Market Economy with Exogenous Incomes

III.3.1 Motivation

III.3.2 The Autarky Interest Rate

III.3.3 Gains from Intertemporal Trade?

III.4 Intertemporal Trade with Production

III.5 Savings, Investment, and the Current Account

III.6 Savings, Investment, and the Current Account in a Market Economy

III.6.1 Motivation

III.6.2 Consumers’ Saving Decision and Portfolio Choices

III.6.3 Firms’ Labor Demand and Investment

III.6.4 Equilibrium

III.6.5 Gains from Intertemporal Trade?

III.7 An Infinite Time Horizon

III.7.1 Motivation

III.7.2 Optimization with an Infinite Time Horizon

III.7.3 A Variable Interest Rate

III.8 Endogenizing the World Interest Rate

III.8.1 Motivation

III.8.2 The World Interest Rate in Equilibrium

III.8.3 Comparative-Static Analysis: Changes in the World Interest Rate

III.9 Summary and Outlook

III.10 Keywords

III.11 Literature

III.12 Exercises

III.13 Appendix to Chapter III

IV Intertemporal Trade: Applications and Extensions

IV.1 Introduction and Overview

IV.2 Demographic Change, International Investment, and the Current Account

IV.2.1 Motivation

IV.2.2 A Simple OLG Model

IV.2.3 “Baby Boom”, “Baby Bust”, and the Current Account

IV.2.4 Demographic Change and the Current Account: The Role of Investment

IV.3 Government Spending, Budget Deficits, and the Current Account

IV.3.1 Motivation

IV.3.2 Government Spending and Budget Deficits in the Representative-Consumer Model

IV.3.3 Ricardian Equivalence: Critique

IV.3.4 Budget Deficits in an OLG Model

IV.4 Limited Tradability, the Terms of Trade, and the Current Account

IV.4.1 Motivation

IV.4.2 Non-Tradable Goods: Definition and Relevance

IV.4.3 Non-Tradable Goods in a Small Open Economy

IV.4.4 Economic Growth, Non-Tradable Goods, and the Current Account: An Example

IV.4.5 The Terms of Trade and the Current Account

IV.4.6 Trade Costs, the Effective Interest Rate, and the Current Account

IV.5 Uncertainty and International Diversification

IV.5.1 Motivation

IV.5.2 Decisions under Uncertainty: A Brief Review

IV.5.3 Income Uncertainty and Savings

IV.5.4 International Diversification: Model Structure

IV.5.5 International Diversification: Determining Asset Prices

IV.5.6 The Optimal Portfolio in Equilibrium

IV.5.7 International Diversification: Some Evidence

IV.6 Summary and Outlook

IV.7 Keywords

IV.8 Literature

IV.9 Exercises

IV.10 Appendix to Chapter IV

IV.10.1 The Evolution of the Net International Investment Position in an OLG Model with Endogenous Production

IV.10.2 Conditional Demand Functions in a Model with Non-Tradable Goods

IV.10.3 The Aggregate Price Level in a Model with Non-Tradable Goods

IV.10.4 The Consumption Aggregator for ? = 1

V International Capital Flows and Economic Growth

V.1 Introduction and Overview

V.2 The Neoclassical Growth Model for the Closed and the Open Economy

V.2.1 Motivation

V.2.2 The Neoclassical Growth Model in a Closed Economy with an Exogenous Saving Rate

V.2.3 The Neoclassical Growth Model of a Closed Economy with an Endogenous Saving Rate

V.2.4 Financial Integration and Economic Growth in the Neoclassical Model

V.3 Endogenous Growth: AK Models

V.3.1 Motivation

V.3.2 Learning-by-Doing in a Closed Economy

V.3.3 Financial Integration and Endogenous Growth

V.3.4 International Diversification and Growth

V.4 Endogenous Technological Change

V.4.1 Motivation

V.4.2 Horizontal Innovation and Growth

V.4.3 Vertical Innovation, „Creative Destruction“, and Growth

V.4.4 Endogenous Technological Change in Open Economies

V.4.5 Innovation and Imitation

V.4.6 Globalization and Growth: Empirical Evidence

V.5 Summary and Outlook

V.6 Keywords

V.7 Literature

V.8 Exercises

V.9 Appendix to Chapter V

V.9.1 Deriving the Average Growth Rate in the Aghion-Howitt Model ofVertical Innovation

VI Assessing Intertemporal Solvency and Creditworthiness

VI.1 Introduction and Overview

VI.2 Characterizing Intertemporal Solvency

VI.3 Default: Determinants and Consequences

VI.3.1 Motivation

VI.3.2 The Costs of a Default: Financial Embargo

VI.3.3 The Costs of a Default: Direct Costs

VI.3.4 Uncertainty and Multiple Equilibria

VI.3.5 Distributional Conflict and Default

VI.3.6 Expropriation

VI.4 Summary and Outlook

VI.5 Keywords

VI.6 Literature

VI.7 Exercises

VI.8 Appendix to Chapter VI

VI.8.1 The Default Decision with an Embargo Threat

VI.8.2 The Effect of Output Volatility on the Critical Net International Investment Position

VI.8.3 The Default Decision with Direct Costs

VII The Real Exchange Rate

VII.1 Introduction and Overview

VII.2 Definitions

VII.2.1 The Bilateral Real Exchange Rate

VII.2.2 The Real Effective Exchange Rate

VII.3 Purchasing Power Parity

VII.3.1 The Law of One Price and Absolute Purchasing Power Parity

VII.3.2 The Law of One Price: Empirical Evidence

VII.3.3 Deviations from the Law of One Price: Determinants and Interpretations

VII.3.4. Relative Purchasing Power Parity

VII.3.5 Relative Purchasing Power Parity: Empirical Evidence

VII.4 Non-Tradable Goods, the Terms of Trade, and the Real Exchange Rate

VII.4.1 Dissecting the Real Exchange Rate

VII.4.2 The Balassa-Samuelson Model

VII.4.3 The Dutch Disease

VII.4.4 The Terms of Trade and the Real Exchange Rate

VII.5 The Real Exchange Rate and Net Exports

VII.5.1 The Marshall-Lerner Condition

VII.5.2. The Real Exchange Rate and a Country’s “Price Competitiveness”

VII.6 The Equilibrium Real Exchange Rate

VII.6.1 Motivation

VII.6.2 Putting Purchasing Power Parity to Use

VII.6.3 Reduced-Form Estimates

VII.6.4 External Balance and the Real Exchange Rate

VII.7 Summary and Outlook

VII.8 Keywords

VII.9 Literature

VII.10 Exercises

VIII The Nominal Exchange Rate

VIII.1 Introduction and Overview

VIII.2 Exchange Rate Regimes

VIII.2.1 Motivation

VIII.2.2 Exchange Rate Regimes and the Central Bank’s Foreign Reserves

VIII.2.3 Foreign Exchange Reserves and the Money Supply

VIII.2.4 Exchange Rate Regimes in Detail

VIII.3 Capital Mobility, Interest Rates, and the Nominal Exchange Rate

VIII.3.1 Spot and Forward Exchange Rates

VIII.3.2 Covered Interest Rate Parity

VIII.3.3 Uncovered Interest Rate Parity

VIII.3.4 Determining the Nominal Exchange Rate under Perfect Capital Mobility: A Simple Diagram

VIII.4 The Monetary Model of Exchange Rates

VIII.4.1 Motivation

VIII.4.2 Money Supply and Money Demand

VIII.4.3 Rational Expectations

VIII.4.4 The Structure of the Monetary Model of the Exchange Rate

VIII.4.5 The Nominal Exchange Rate in Equilibrium

VIII.4.6 Speculative Bubbles

VIII.4.7 A Look at the Data

VIII.4.8 The Monetary Model with a Fixed Exchange Rate

VIII.5 Exchange-Rate Overshooting

VIII.5.1 Motivation

VIII.5.2 The Dornbusch Model: Structure and Assumptions

VIII.5.3 Dynamic Properties of the Model

VIII.5.4 Expansionary Monetary Policy and Exchange Rate Overshooting

VIII.6 The Portfolio Balance Approach and Foreign Exchange Interventions

VIII.6.1 Motivation

VIII.6.2 Foreign Exchange Interventions in a Portfolio Balance Model

VIII.7 Summary and Outlook

VIII.8 Keywords

VIII.9 Literature

VIII.10 Exercises

IX Monetary Policy, Fiscal Policy, and Aggregate Demand in an Open Economy

IX.1 Introduction and Overview

IX.2 The Mundell-Fleming Model

IX.2.1 Motivation

IX.2.2 Structure and Assumptions

IX.2.3 The Effect of Demand Changes on Output

IX.2.4 The Mundell-Fleming Model of a Small Open Economy with Perfect Capital Mobility

IX.2.5 Equilibrium and Comparative Static Analysis for a Fixed Exchange Rate

IX.2.6 Equilibrium and Comparative Static Analysis for a Flexible Exchange Rate

IX.2.7 Two Large Open Economies

IX.2.8 Stabilization Policies in Open Economies

IX.3 The New Open Economy Macroeconomics

IX.3.1 Motivation

IX.3.2 The Corsetti and Pesenti (2001) Model: Structure and Assumptions

IX.3.3 Optimization

IX.3.4 Equilibrium

IX.3.5 Demand Shocks and their Effects

IX.3.6 Consumption and Production in the Short Run and the Long Run: A Graphical Exposition

IX.3.7 Expansionary Monetary Policy in the Domestic Economy: Consequences for Consumption, Production, and Welfare

IX.3.8 Expansionary Monetary Policy in the Foreign Economy: Consequences for Consumption, Production, and Welfare

IX.3.9 Expansionary Fiscal Policy in the Domestic Economy: Consequences for Consumption, Production, and Welfare

IX.3.10 Expansionary Fiscal Policy in the Foreign Economy: Consequences for Consumption, Production, and Welfare

IX.4 NOEM: Modifications

IX.4.1 The Model of Corsetti and Pesenti: Summary

IX.4.2 Variants of the Redux Model: The Original

IX.4.3 Variants of the Redux Model: Consumption Home Bias

IX.4.4 Variants of the Redux-Model: Market Segmentation and Pricing to Market

IX.5 Summary and Outlook

IX.6 Keywords

IX.7 Literature

IX.8 Exercises

IX.9 Appendix to Chapter IX

IX.9.1. Long-Run Goods Market Equilibrium (GE) in the CP Model

IX.9.2. Long-Run Labor-Market Equilibrium (LE) in the CP Model

IX.9.3. Long-Run Money-Market Equilibrium (ME) in the CP Model

IX.9.4 Short-Run Goods-Market Equilibrium (GE?) in the CP-Model

IX.9.5 Short-Run Money-Market Equilibrium (ME?) in the CP-Model

IX.9.6 Welfare Consequences of a Domestic Money-Supply Increase in the CP-Model

X Exchange Rate Regimes, Crises, and the International Financial Architecture

X.1 Introduction and Overview

X.2 Exchange Rate Regimes, Inflation, and Macroeconomic Stability

X.2.1 A Simple Theoretical Framework

X.2.2 The Central Bank’s Objective Function

X.2.3 Production, Inflation, and Welfare with a Fixed Exchange Rate

X.2.4 Production, Inflation, and Welfare with a Flexible Exchange Rate

X.2.5 Exchange Rate Regimes and Inflation: Empirical Evidence

X.2.6 Output, Inflation, and Welfare for Alternative Exchange Rate Regimes: A Comparison

X.2.7 Optimal Monetary Policy in a Reduced NOEM Model

X.3 International Financial Crises

X.3.1 Motivation

X.3.2 Balance of Payments Crises in the Krugman (1979) Model

X.3.3 Balance of Payments Crises and Multiple Equlibria: The Model of Obstfeld (1996)

X.3.4 Currency Crises and the Financial Sector

X.3.5 Contagion among Financial Institutions and the Global Financial Crisis

X.3.6 Sudden Stops Inside and Outside Europe

X.4 On the International Financial Architecture

X.4.1 Motivation

X.4.2 Choosing an Exchange Rate Regime

X.4.3 Capital Controls Redux?

X.4.4 The Role of the IMF

X.4.5 The Role of the World Bank

X.5 Summary

X.6 Keywords

X.7 Literature

X.8 Exercises

X.9 Appendix to Chapter X

X.9.1 Deriving optimal second-period consumption in the constrained equilibrium

X.9.2 Deriving the marginal utility of second-period debt from a social planner’s perspective

References

Subject Index