International Finance 
Econ 280B

Winter 2010 - Henning Bohn
UC Santa Barbara


This web page provides the course outline and access some PDF files that we will use in class.
This page and the resources listed are for UCSB students enrolled in Econ 280B only.
Major announcement and chance in the class will be posted here; please check throughout the quarter.

Annoucements:

• Deadline for the paper: Thursday, March 18, 5pm. (Early submission appreciated -- would help getting your grade reported more quickly.)

• Final exam as scheduled by the registrar: Thursday, March 18, 12-3pm.
• Here is how the instructions will read:
Directions: The exam has two parts. You have 3 hours for the entire exam. Part 1 is closed book and must be done first.  Part 2 is open textbook. Open textbook means you can use Obstfeld-Rogoff but no other resources. You may turn to part 2 whenever you are ready, but once you have opened the book, you cannot go back to part 1; that is, NOT add or modify or delete anything in part 1.
Hints: Imagine that your essays are addressed to an audience of economists who have not taken Econ 280B. Define the most relevant technical terms. Whenever possible, explain the economic intuition underlying your claims. When you cite articles, explain the contents in a way that is understandable to someone who has not read the articles. Be precise; it may be worth setting up a model.
        Part 1 will be essay questions (with some choice). Part 2 with be an analytical problem.

General Information:

The course will survey the principles of international finance and open economy macroeconomics. The main topics are current account dynamics, exchange rate determination, international risksharing, and policy issues in the open economy. Prerequisites are Econ 204A-B.
Course Description

The main textbook is: Maurice Obstfeld and Kenneth Rogoff: Foundations of International Macroeconomics, MIT Press, 1996.

Regular office hours: TR 3:30-4:30 in NH 3016.

E-mail: bohn@econ.ucsb.edu.      

Course Outline and Reading List:
Notes: • = required, read before class and be prepared to lead the discussion; - = supplemental. Readings and time schedule will be updated throughout the quarter.
Note that many download links can only be accessed through a UCSB server.
    Class#1: Introduction  
• Obstfeld/Rogoff ch.1.1-1.2.
- Slides01.

    Class#2: Savings, Investment, and the Feldstein-Horioka puzzle
• Obstfeld/Rogoff ch.1.3. [Focus on 1.3.1, 1.3.3]
• Bernanke: The Savings Glut.
• Feldstein/Horioka, Domestic Saving and International Capital Flows, Economic Journal 90, 1980. [Focus on sec. I-III.]

    Class#3: Taxation; factor price equalization
• Obstfeld/Rogoff ch.1.4-1.5.
    Class#4: Small-open deterministic models
• Obstfeld/Rogoff ch.2.1-2.2. [Focus on 2.1.1, 2.2.1]

    Class#5-6: Small-open stochastic models
• Obstfeld/Rogoff ch.2.3. [Focus on 2.3.1-2.3.3, 2.3.5]
- Obstfeld/Rogoff ch.2.4 (skim).

    Class#7: Adjustment cost and Tobin's-q
• Obstfeld/Rogoff ch.2.5. [Focus on 2.5.1-2.5.2]
• Mendoza, Real Business Cycles in a Small Open Economy, American Economic Review 81, Sept. 1991.

   Class#8: International RBC
• Backus/Kehoe/Kydland: International Real Business Cycles, Journal of Political Economy 1992, 745-775.
- Obstfeld/Rogoff ch.7.4
- Baxter and Crucini, Explaining Savings-Investment Correlations, American Economic Review 83, June 1993.
    Class#9: Fiscal policy and the current account
• Obstfeld/Rogoff ch.3.1-3.4. [Focus on 3.2.1-3.2.2, 3.3.1-3.3.2]

    Class#10: World economy with OG
• Obstfeld/Rogoff ch.3.5-3.7. [Focus on 3.6.1-3.6.3]
- Bohn, Optimal Private Responses to Demographic Trends, in Kent et al (eds): Demography and Financial Markets, Reserve Bank of Australia, 2006.
    Class#11: Non-traded goods and PPP
• Obstfeld/Rogoff ch.4.1-4.2. [Focus on 4.2.1-4.2.3]
• Engel, C. and J. Rogers, “How Wide is the Border?” American Economic Review 86, December 1996, 1112-1125.
- Rogoff, Kenneth, The Purchasing Power Parity Puzzle, Journal of Economic Literature 34, June 1996, 647-668.

    Class#12: Terms of trade.
• Obstfeld/Rogoff ch.4.5.
• Atkeson, Andrew, and Ariel Burstein. Pricing-to-Market, Trade Costs, and International Relative Prices. American Economic Review 98(5), 2008, 1998–2031. [Focus on sec. I-III]

    Class#13: Basic monetary models
• Obstfeld/Rogoff, ch.8.1-8.4 [Focus on 8.2.7, 8.4.1.1, 8.4.2)]
• Engel, Charles, Nelson C. Mark, and Kenneth D. West, Exchange Rate Models
Are Not as Bad as You Think, NBER w13318 (publ. in Macroeconomics Annual 2007). [Focus on pp.1-20.]
- Obstfeld: The Global Capital Market: Benefactor or Menace? Journal of Economic Perspectives 12, Fall 1998, 9–30. [Focus on the 'trilemma']


   Class#14: Unbalanced Growth.
• Obstfeld and Rogoff, The Unsustainable US Current Account Position Revisited, in Richard H. Clarida, ed., G7 Current Account Imbalances: Sustainability and Adjustment, 2007. (NBER wp 2004)
• Obstfeld and Rogoff, Global Imbalances and the Financial Crisis: Products of Common Causes, working paper 2009.
• Dooley, et al.: An Essay on the Revived Bretton Woods System, NBER #9971, 2003. (pub. in International Journal of Finance and Economics, 2004)
- Dooley, et al.: Bretton Woods II Still Defines the International Monetary System, NBER #14731, 2009.
- Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates." American Economic Review 98(1), 2008, 358–93.
- Takatoshi Ito, Fire, Flood, and Lifeboats: Policy Responses to the Global, Crisis of 2007-09, working paper 2009.

    Class#15: Open economy models with risky assets
• Obstfeld/Rogoff ch.5.1-5.4. [Focus on 5.1-5.1.6, 5.2.1, 5.2.4, 5.3]

    Class#16: Portfolio diversification and the home bias puzzle
• Baxter, Marianne, and Urban Jermann, The International Diversification Puzzle is Worse Than You Think, American Economic Review 87, March 1997, 170-180.
- Cole, H. and M. Obstfeld, Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter? Journal of Monetary Economics 28, 1991, 3-24.  
- Obstfeld, Risk-Taking, Global Diversification, and Growth, American Economic Review 84, Dec. 1994
- Heathcote and Perri: The International Diversification Puzzle Is Not As Bad As You Think, NBER Working Paper No. 13483, October 2007. [Focus on sec. 1-3]
- Gordon and Bovenberg, Why is Capital So Immobile Internationally? Possible Explanations and Implications for Capital Income Taxation, American Economic Review 86, Dec. 1996.
- Lucas, R.E., Interest Rates and Currency Prices in a Two-Country World, Journal of Monetary Economics 10, 1982, 335-359.
- Bohn and Tesar, U.S. Equity investment in foreign markets, American Economic Review 86, May 1996.

    Class#17: Student presentations; if time, review of remaining topics.
    [not responsible for material below]
   
        Asset values and current account adjustment
• Gourinchas/Rey: International Financial Adjustment, Journal of Political Economy 115 (August 2007): 665-703.
- Kraay, Aart and Jaume Ventura, Current Accounts in Debtor and Creditor Countries, Quarterly Journal of Economics 115, 2000, 1137-1166.

        Sovereign Risk and Crises
• Obstfeld/Rogoff, ch.6.1-6.2 [Focus on 6.1.1, 6.2.1]
- Borensztein and Panizza, The Costs of Sovereign Default, IMF Staff Papers 56, 2009. (link to working paper)
- Aart Kraay, Norman Loayza, Luis Servén and Jaume Ventura, Country Portfolios, Journal of the European Economic Association 3, 2005), 915-945.
- Cole, Harold, and Patrick Kehoe, Models of Sovereign Debt: Partial Versus General Reputations, International Economic Review 39, February 1998, 55-70.
- Cole, Harold, and Patrick Kehoe, Self-Fulfilling Debt Crises, Review of Economic Studies 67, 2000, 91-116.
- Kaminsky and Reinhart, "The Twin Crises: The Causes of Banking and Balance-of-Payment Problems," American Economic Review 89, 1999.

    Class March 11:  Review.

Please send any comments to bohn@econ.ucsb.edu
Comments on the readings, e.g., about their perceived relevance (or lack of) or degree of difficulty are particularly appreciated.