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International Balance of Payments : Introduction

International Balance of Payments : Introduction. Roberto Chang January 2013. Welcome !. International Macroeconomics is one of the most exciting and lively subjects in Economics Related to a host of important real world problems

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International Balance of Payments : Introduction

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  1. International Balance of Payments: Introduction Roberto Chang January2013

  2. Welcome! • International Macroeconomicsisone of themostexciting and livelysubjects in Economics • Relatedto a host of important real worldproblems • And someotherthat are not as obviouslyimportant, butinstructive as well

  3. A Nobel Prize “Problem” Or, WhyEven Nobel Prizewinnersshouldtakethiscourse

  4. The Nobel Prize Tale • The 2012 Nobel Prize in EconomicswasannouncedonMondayOctober 15, 2012 • Theprize, 10 millionSwedishkrona, wasawardedonSaturday, December 8th • Thewinners: AlvinRoth (Harvard) and Lloyd Shapley (UCLA)

  5. WhyshouldevenRoth and Shapleycareabout International Macro? • Presumably (sincetheylive in the US) Roth and Shapley do notcareaboutkronas, butabout US dollars. • In otherwords, theymustcareaboutthevalue of kronas in US dollars: theexchangerate.

  6. Thekrona-dollarexchangerate • October 15, 2012: 1 US dollar = 6.70 kronas • End of May: 1 US dollar = 7.26 kronas • The US dollardepreciatedorbecameweakeragainstthekrona. • Thekronaappreciatedagainstthedollar.

  7. The Nobel Award, in dollars • October 15 (announcement date): 10,000,000 kronas/6.70 kronas per dollar = 1,492,537 dollars • At Mayexchangerate: 10,000,000 kronas/7.26 kronas per dollar = 1,377,410 dollars  In thefourmonthsbeforetheannouncement, thedollarvalue of theprizeincreasedby $ 115 126!!

  8. WhatshouldRoth-Shapleyhave done? • As youwilllearn in thiscourse, itispossibletocontracttopurchasedollarsforkronas at a given date in thefuture and at a fixed(e.g. locked in advance) rate • Theagreeduponrateiscalled a forward rate • So RS couldhave “locked” thedollarvalue of theirprize as soon as theylearnedtheyhad won

  9. Actually, whyshouldtheycare? • Why do weassumethatRoth-Shapleycareaboutthedollarvalue of theaward, instead of thekronavalue? • Answer: Presumably, thedollarprices of goodstheycareabout are fixed in dollars, at least in the short run. • Theimportance and implications of suchnominal rigiditieswill be a substantialpart of thiscourse.

  10. Course Content, Logistics, etc.

  11. Contents • A lot of interestingstuff • Exchange Rates • CurrentAccounts and International Wealth • Currencies • Crises • And on and on…

  12. But… • …whilethiscourseisforyou… • …I expectyoutoworkhard… • …tolearn and applythetechnicalapparatusneededtothinkabouttheseproblems as aneconomist

  13. Prerequisites • Intermediate Macro • Econometrics • And theirprerequisites • I willnotrefrainfromderivatives, t-statistics, etc. ifneeded

  14. Main Text • International MacroeconomicsbyRobFeenstra and Alan Taylor • Secondedition (2012) • Excellentintro and useful web site

  15. The Global Macroeconomy

  16. Additionaltext • International Macroeconomicsby Stephanie Schmitt Grohe and Martin Uribe • Unpublished, currentversion 2013 (will be availablefrommy web site) • More technicallyadvanced

  17. AdditionalReadings • I willfeel free toassignanysupplementary material, as eventsorclassdiscussion warrant • Relevanteventshappeneveryday! • Make a habit of readingTheEconomist, FT, NY Times, WSJ… and relate whatyoulearnheretotheirdiscussion

  18. Formal Requirements • Fivehomework sets • FirstMidterm: March 11th • SecondMidterm: April 18th • Final Exam: May 10th

  19. Grades • Homeworks: 10% • If final grade islowerthantheaverage of twomidterms, eachexamcountsfor 30% of grade • Ifnot, final is 50% and thebest of midtermsfor 40% • Hence, no make ups!

  20. Office Hours, etc. • My regular office hours: Thursdays 2:30-4:00, orbyappointment • Announcements, materials, etc. will be posted in my web page

  21. NextClass • Pleasereadchapters 1 and 2 of FT

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