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Office: Tydings 4118G |
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Fall 2010 |
E-mail: vegh@econ.bsos.umd.edu |
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Wednesdays, 5.15-7.45 pm |
Home page: http://www.econ.umd.edu/~vegh |
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Tydings 1132 |
Office hours:
Tuesdays, |
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Wednesdays 2-3.30 pm,
or by appointment. |
INTERNATIONAL FINANCE
(Econ 741)
Course objective
This is a graduate course on open economy macroeconomics. The lectures will focus on developing a common analytical framework that can be used to think about real world problems. Students will be expected to develop a good grasp of both the analytical tools and the relevant policy issues. In addition to the material covered in the lectures and the required readings, students are expected to familiarize themselves with current events in the world economy by reading financial publications such as the Economist, the Financial Times, and the Wall Street Journal, and cultivating the ability to use applied theory to think about policy issues.
Resources on the internet
This course outline contains numerous links to relevant websites. (In the hard
copy, links show up as underlined expressions.) Most of the readings below are
also available online by following the corresponding links. Students are thus
encouraged to check this reading list online at http://www.econ.umd.edu/~vegh/courses/Econ741/Readings-Econ741.htm
Course requirements
There will be a midterm exam that will cover the first four topics below (i.e., the first four chapters of the book that deal with real models). The midterm will count for 40 percent of the final grade. In addition, there will be a three-hour final exam at the end of the course (which will cover the whole course), which will count for 60 percent of the grade.
As the course progresses, you should be solving all the exercises at the end of each chapter and come to see me if you have any doubts/questions. This will test your understanding of the material. Developing the ability to solve these problems is the best preparation for the midterm and the final. I will post answer keys as the course progresses.
Lectures
Lectures are a supplement and not a substitute for the readings. The lectures are designed to cover the most fundamental issues and provide a foundation for the readings. It is essential that students work carefully their way through (at least) the book chapters and the required readings (marked below with an asterisk) as the course progresses. The final may include topics covered by the book and/or required readings that were not dealt with in class. Students should take full advantage of the office hours to clarify doubts.
Textbooks
The course will follow a textbook that I am currently writing for MIT Press (see
references to textbooks below). I will
also distribute handouts in class. In addition, I would highly recommend that
students purchase the textbook by Obstfeld and Rogoff, which provides a
detailed treatment of many topics in open economy macroeconomics. Students
particularly interested in development macroeconomics may also be interested in
purchasing the textbook by Agenor and Montiel, which covers some of the
course's topics.
Field exam in international finance
For the current academic year (2008-2009), the core material for the field exam in international finance will be the one covered in this course and Professors Korinek and Reinhart’s courses in the Spring semester. Notice, though, that the field exam may go beyond the material covered in these three courses and include other (related) material.
Contents of the course
The course will cover the following topics:
BACKGROUND
The following books are of general interest for this course and also contain some of the readings. By clicking on the title of most of these books, you will get more information on the book directly from the publisher; you may also purchase any of these books from amazon.com. By clicking on the authors' names, you can reach their homepages (when available).
Advanced textbooks
[VE] Vegh, Carlos A., Open Economy Macroeconomics in Developing Countries (forthcoming, MIT Press). This textbook – currently under preparation – will cover the most important issues in open economy macroeconomics from the perspective of a small (and developing) open economy. The drafts corresponding to the first two parts of the book (Part I: Real building blocks and Part II: Monetary building blocks) are available online. As the course progresses, you will be asked to solve many of the exercises at the end of the chapters and hand them in.
[OR] Obstfeld,
Maurice, and Kenneth
Rogoff , Foundations
of International Macroeconomics (Cambridge, Mass.: MIT Press,
1996). Covers most important issues in
international finance.
[FR] Frenkel, Jacob, and Assaf Razin, with the collaboration of Chi-WaYuen, Fiscal
Policies and Growth in the World Economy (Cambridge, Mass.: MIT Press,
Third edition, 1996). A detailed treatment of intertemporal models and the
role of fiscal policy.
[AM] Agenor, Pierre-Richard, and Peter Montiel, Development Macroeconomics (Princeton, New Jersey: Princeton University Press, Second edition, 1999). A thorough analysis of macroeconomic issues relevant for developing countries.
[BF]
[ED] Edwards, Sebastian, Real Exchange
Rates, Devaluation, and Adjustment (Cambridge, Mass.: MIT Press,
1989). A detailed study of real exchange rate determination and the effects
of devaluation.
Collected essays
[CA1] Calvo, Guillermo A., Money, Exchange Rates, and Output (Cambridge, Mass.: MIT Press, 1996).
[CA2] Calvo, Guillermo A., Emerging Markets in Turmoil: Bad Luck of Bad Policy? (Cambridge, Mass.: MIT Press, 2005).
[DO] Dornbusch, Rudiger,
Exchange
Rates and Inflation (Cambridge, Mass.: MIT Press, 1988).
Intermediate level textbooks
[SL] Sachs,
Jeffrey, and
[KO] Krugman, Paul, and Maurice Obtsfeld, International Economics: Theory and Policy (Harper Collings, 6th edition, 2002). The most popular textbook in undergraduate courses in international finance.
COURSE OUTLINE AND
(required readings are indicated with an asterisk)
1. THE BASIC INTERTEMPORAL MODEL
Sachs,
*Vegh, Carlos A., "The Basic Intertemporal Model"
(Chapter 1 in VE volume).
*Rogoff, Kenneth and Maurice Obstfeld, "Intertemporal Trade and the Current Account Balance"
(Chapter 1 in OR volume) and “Dynamics of Small Open Economies" (Chapter 2).
Blanchard, Olivier, and Stanley Fischer, "Consumption and Investment: Basic
Infinite Horizon Model," Chapter 2 in BF volume.
Tornell,
Kraay,
*Aguiar, Mark and Gita Gopinath, “Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, Vol. 115 (2007). A quantitative analysis of the countercyclicality of the current account and other business cycles features in emerging economies. [NBER version available by clicking on the title.]
Ju, Jiandong, and Shang-Jin Wei, “Current Account Adjustment: Some New
Theory and Evidence," NBER Working Paper No. 13388 (September 2007). The
role of intratemporal trade in current account adjustment. [Paper available
from the NBER by clicking on the title.]
2.
CAPITAL MARKET IMPERFECTIONS
*Vegh, Carlos A., "Capital Market Imperfections" (Chapter 2 in VE volume).
*Rogoff, Kenneth and Maurice Obstfeld, "Imperfections in International Capital Markets" (Chapter 6 in OR volume)
*Eaton, Jonathan and Mark Gersovitz (1981). "Debt with potential repudiation: Theory and estimation." Review of Economic Studies 48, 289-309. A classical paper in this area. [Available from JSTOR by clicking on the title.]
Reinhart, Carmen M., Kenneth Rogoff,
and Miguel A. Savastano, "Debt Intolerance," Brooking Papers
on Economic Activity (2003, 1-74). Why
can’t emerging countries sustain the same debt-levels as industrial countries?
[NBER Working Paper # 9908 version available by clicking on the title.]
*Uribe, Martin, "On Overborrowing," NBER Working
Paper No. 11913 (January 2006). A
comparison of the effects of aggregate and individual debt constraints. [Paper available
from the NBER by clicking on the title.]
Aguiar, Mark and Gita Gopinath, "Defaultable debt, interest rate, and the current account," NBER Working Paper No. 10731 (September 2004). A quantitative model of debt and default in an open economy. [Paper available from the NBER by clicking on the title.]
*Neumeyer, Pablo A., and Fabrizio Perri, "Business cycles in emerging economies:
The role of interest rates," Journal of Monetary Economics, Vol. 52
(March 2005), pp. 345-80. ( NBER Working Paper No. 10387 (March 2004) version
available by clicking on the title.) A
quantitative examination of the effects of default risk on emerging economies’
business cycles.
*Kaminsky, Graciela, Carmen Reinhart,
and Carlos A. Vegh, "When It Rains
It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Macro Annual 2004 (Kenneth
Roggoff and Mark Gertler, editors), forthcoming. [Available as NBER Working
Paper by clicking on the title.] Provides
evidence on the procyclicality of capital flows (i.e., countries borrow in good
times and repay in bad times).
Alfaro, Laura and Fabio Kanczuk, "Nominal versus Indexed Debt: A Quantitative Horse Race," NBER Working Paper No. 13131 (May 2007). Quantifies the costs and benefits of nominal versus indexed debt. [Paper available from the NBER by clicking on the title.]
Yue, Vivian, "Sovereign Default and Debt Renegotiation," (mimeo, 2006). A quantitative model of debt and default in an open economy.
Pallage, S., and M. Robe (2003). "On the welfare cost of economic
fluctuations in developing countries," International Economic Review
44, pp. 677-698. Concludes that,
contrary to the conventional wisdom for the United States, costs of economic
fluctuations in developing countries are sizable.
Jacob, Kris, Stephane Pallage, and Michel A. Robe (2005). "The welfare costs of macroeonomic fluctuations under incomplete markets: Evidence from state-level consumption data," Working Paper 05-24 (CIRPEE). Estimates welfare costs of incomplete markets using state-level consumption data for the United States.
Gourinchas, Pierre-Olivier and Olivier Jeanne, "The Elusive Gains from International Financial Integration," Review of Economic Studies, Vol. 73 (2006), pp. 1-27. Argues welfare gains of financial integration are small.
Reinhart, Carmen M., and Kenneth Rogoff, "The Forgotten History of Domestic Debt," NBER Working Paper No. 13946 (April 2008). An empirical analysis of the importance of domestic debt and how it relates to external debt. [Paper available from the NBER by clicking on the title.]
Mendoza, Enrique G., and Vivian Z. Yue, "A Solution to the Default Risk-Business Cycle Disconnect," NBER Working Paper No. 13861 (March 2008). Provides an analytical link between external and domestic debt defaults. [Paper available from the NBER by clicking on the title.]
3. INTERTEMPORAL DISTORTIONS
*Vegh, Carlos A., "Intertemporal distortions" (Chapter 3 in VE volume).
*Calvo, G. A., "On the Costs of Temporary Policy," Journal of
Development Economics, Vol. 27 (1987), pp. 245-262. Analyzes the
intertemporal distortions introduced by temporary trade liberalizations. [Reprinted
as chapter 16 in CA volume.]
*Calvo, G.A., "Costly Trade Liberalizations: Durable Goods and Capital
Mobility" International Monetary Fund Staff Papers, Vol. 35
(September 1988), pp. 461-473. Durable goods accumulation as the source of
distortions. [An exercise in Chapter 3
is based on this paper; I suggest you first try to solve the exercise on your
own and only read the paper afterwards.]
Engel, C., and K.M. Kletzer, "Trade Policy under Endogenous
Credibility," Journal of Development Economics, Vol. 36 (1991),
pp. 213-228. Endogeneizes credibility by introducing Bayesian learning
about the government's intentions. [Another exercise in Chapter 3 is based on this
paper, same advice!]
van Wijnbergen, S. "Trade
Reform, Policy Uncertainty, and the Current Account: A Non-Expected-Utility
Approach"
American Economic Review, Vol. 82 (1992), pp. 626-633. [Paper
available from JSTOR by clicking on the title.] Temporary policies under
more general preferences.
Calvo,
4. NON-TRADED GOODS AND THE
REAL EXCHANGE RATE
4.1 Basic issues
Sachs, Jeffrey and Felipe Larrain, "Tradable and Nontradable
Goods," Chapter 21 in SL volume. An introduction to some of the main
issues in models with traded and non-traded goods. [Another excellent
chapter in this undergraduate textbook that I highly recommend for anybody with
weak background in open macro.]
*Vegh, Carlos A., "Non-Traded Goods and Relative Prices" (Chapter 4 in V
volume).
*Rogoff, Kenneth, and Maurice Obtsfeld, "The Real Exchange Rate and the Terms of Trade," Chapter 4 in OR volume.
Edwards, Sebastian, Chapters 2, 4, and 5 in ED volume. Theory and
evidence on the behavior of the real exchange rate in developing countries.
*Dornbusch, Rudiger, "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, Vol. 91 (February 1983), pp. 141-153. Reprinted as Chapter 16 in DO2 volume. Analyzes how the presence of non-traded goods affects the real interest rate relevant for consumption decisions. [Paper available from JSTOR by clicking on the title.] [An exercise in Chapter 4 is based on this paper, same advice!]
Ostry,
Jose De Gregorio, Alberto Giovannini, Holger C. Wolf, "International
Evidence on Tradables and Nontradables Inflation," European Economic
Review, Vol. 38 (1994), pp. 1225-1244. Detailed empirical evidence for
OECD countries.
*Burstein, Ariel, Martin Eichenbaum, and Sergio Rebelo, "The Importance of Non-Tradable Goods’ Prices in Cyclical Real Exchange Rate Fluctuations," NBER Working Paper No. 11699. Concludes that changes in the price of non-tradable goods relative to tradable goods accounts for around 50 percent of the cyclical movement in real exchange rates. [Paper available from the NBER by clicking on the title.]
4. 2 Fiscal policy
in the open economy
*Frenkel, J. and A.
Razin, "Fiscal
Policies in the World Economy," Journal of Political Economy,
Vol. 94 (1986), pp. 564-594. [Paper available from JSTOR by clicking on the
title.]
*Rogoff, Kenneth, and
Maurice Obstfeld, "The Life Cycle, Tax Policy, and the Current
Account," Chapter 3 in OR volume.
Frenkel, Jacob and Assaf
Razin, "Stylized Facts on Fiscal Policies and International Economic
Interdependence," Chapter 1 in FR volume.
Frenkel, Jacob and Assaf
Razin, Chapters 8 through 10 in FR volume.
Giavazzi, F. and M.
Pagano, "Can Severe Fiscal Expansions Be Expansionary? Tales of Two Small
European Countries," NBER Macroeconomics Annual 1990 (Cambridge,
Mass.: MIT Press, 1990), pp. 75-111. Examines the potentially expansionary
effects of fiscal cuts.
Bertola, G., and
Ahmed, S., "Temporary and Permanent Government Spending in an Open
Economy," Journal of Monetary Economics, Vol. 17 (1986), pp.
197-224. Testing the predictions of
the effects of government spending in an intertemporal model.
Ahmed, S., "Government Spending, the Trade Balance and the Terms of Trade in British History," Journal of Monetary Economics, Vol. 20 (1987), pp. 195-220. Further tests.
4.3 Terms of trade shocks
*Obstfeld, M., "Intertemporal
Price Speculation and the Optimal Current-Account Deficit," Journal
of International Money and Finance, Vol. 2 (1983), pp. 135-145. [Working
paper version available from the NBER by clicking on the title.]
*Svensson, L., and A. Razin, "The
Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect,"
Journal of Political Economy, Vol. 91 (1983), pp. 97-125. An
exhaustive analysis of the Harberger-Laursen-Metzler effect with a variable
rate of time preference.
Ostry, J., and C. Reinhart, "Private Saving and Terms of Trade
Shocks," International Monetary Fund Staff Papers, Vol. 39
(1992), pp. 495-517. Important econometric evidence for theoretical issues
discussed in Chapters 3 and 4 of the VE volume.
*Mendoza, Enrique, "The Terms of Trade, the Real Exchange Rate, and
Economic Fluctuations," International Economic Review, Vol. 36
(February 1995), pp. 101-137. The role of terms of trade shocks in
generating business cycles in developing countries.
5. THE BASIC MONETARY MODEL:
MONEY AS A VEIL
*VE, Chapter 5: The Basic Monetary Model.
*Sargent, Thomas J. and Neil Wallace (1981). "Some unpleasant monetarist arithmetic," Federal Reserve Bank of Minneapolis Quarterly Review, pp. 1-17. [Paper available from the Minneapolis Fed by clicking on the title.] A classical reference on today’s effects of future money growth.
*Drazen, Allan and Elhanan Helpman (1990). "Inflationary consequences of anticipated macroeconomic policies," Review of Economic Studies 57, pp. 147-164. A detailed analysis of the links between today’s inflation and future policy expectations [Paper available from JSTOR by clicking on the title.]
*Lucas, Robert E., Jr. (1982). "Interest rates and currency prices in a
two-country world," Journal of Monetary Economics 10, pp. 335-359. A two-country version of a basic monetary
model.
Svensson, Lars (1985), "Money and asset prices in a cash-in-advance economy," Journal of Political Economy 93, pp. 919-944. A cash-in-advance model with different timing. [Paper available from JSTOR by clicking on the title.]
6. THE MONETARY APPROACH TO THE BALANCE OF PAYMENTS
*VE, Chapter 6: The Monetary Approach to the Balance of Payments
*Calvo, Guillermo A., "Devaluation: Levels versus Rates," Journal
of International Economics, Vol. 11 (1981), pp. 165-172. Reprinted as
Chapter 5 in CA1 volume. Compares the effects of changes in the level of
the exchange rate and changes in the rate of devaluation.
*Dornbusch, Rudiger, "Devaluation, Money, and Non-traded Goods," American Economic Review, Vol. 63 (1973), pp. 871-880. Reprinted as Chapter 1 in DO2 volume. The classical monetary adjustment a la Hume. [Paper available from JSTOR by clicking on the title.]
Obstfeld, Maurice, "Capital Controls, the Dual Exchange Rate, and
Devaluation," Journal of International Economics, Vol. 20 (1986),
pp. 1-20. Examines the effects of a devaluation in the presence of capital
controls.
*Burstein, Ariel, Martin Eichenbaum, and Sergio Rebelo (2005). "Large devaluations and the real exchange rate," Journal of Political Economy 113, pp. 742-784. Longer version available from the NBER by clicking here.
Edwards, Sebastian, Real Exchange Rates, Devaluation, and Adjustment (Cambridge, Mass.: MIT Press, 1989), Chapters 8 and 9. An empirical examination of the effects of a devaluation.
Guidotti, Pablo, and Carlos A. Vegh, "Macroeconomic Interdependence
under Capital Controls: A Two-Country Model of Dual Exchange Rates," Journal
of International Economics, Vol. 32 (1992), pp. 353-367. Shows how, in
the presence of capital controls, the classical monetary adjustment reemerges.
*Calvo, Guillermo, and Carlos Rodriguez, "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, Vol. 85 (1977), pp. 617-626. Introduces a second currency in the standard monetary model. [Paper available from JSTOR by clicking on the title.]
Velasco, Andres and Roberto Chang, "Dollarization: Analytical Issues," NBER Working Paper No. 8838 (March 2002). [Paper available from the NBER by clicking on the title.] The analytics behind some key issues behind dollarized economies.
7.
THE MONETARY APPROACH IN MODERN CLOTHES: TEMPORARY POLICIES
*VE, Chapter 7, The Monetary Approach in Modern Clothes: Temporary Policies
*Calvo, G.A., "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, Vol. 94 (1986), pp. 1319-1329. Models lack of credibility as temporary policy. [Paper available from JSTOR by clicking on the title.]
*Lahiri, Amartya, "Exchange
rate based stabilization under real frictions: The role of endogenous labor
supply," Journal of Economic Dynamics and Control,
Vol. 25 (2001), pp. 1157-1177. Temporary stabilization with investment and
labor responses.
*Calvo, Guillermo A., and Carlos A.Vegh, "Inflation Stabilization and BOP
Crises in Developing Countries," in John Taylor and Michael Woodford, Handbook
of Macroeconomics (Volume C; North Holland, 1999), pp. 1531-1614. Issued
as NBER Working Paper No. 6925 (February 1999). Provides econometric
evidence on the real effects of stabilization in high inflation countries and
examines theoretical explanations for both exchange rate-based and money-based
stabilizations. [Paper available
from the NBER by clicking on the title.]
*Rebelo, S., and C.A. Vegh, "Real Effects of Exchange Rate-Based Stabilization: An Analysis of Competing Theories," NBER Macroeconomics Annual 1995, pp. 125-174. Examines the main theories within an unified framework and evaluates their qualitative and quantitative relevance. [NBER Working Paper version available online by clicking on the title.]
Roldos, Jorge, "Supply-side effects of disinflation programs," IMF
Staff Papers, Vol. 42 (1995), 158-183. Supply-side effects in credible
programs.
Drazen, Allan and Elhanan Helpman, "Stabilization
with Exchange Rate Management," Quarterly Journal of Economics,
Vol. 102, No. 4. (Nov., 1987), pp. 835-856. Studies how the anticipation of
different policies aimed at rendering sustainable an exchange rate-based
stabilization affects the dynamics during the stabilization period.
Reinhart, Carmen M. and Carlos A.Vegh
(1995). "Nominal
interest rates, consumption booms, and lack of credibility: A quantitative
examination," Journal of Development Economics 46, pp. 357-378.
8.
STICKY PRICES
*VE, Chapter 8: Sticky Prices
*Calvo, Guillermo A. and Carlos A. Vegh, "Exchange Rate-Based Stabilisation under Imperfect Credibility" in Open-Economy Macroeconomics, by Helmut Frisch and Andreas Worgotter (London:MacMillan Press, 1993), pp. 3-28. Reprinted as Chapter 18 in CA volume. Temporary stabilization in a staggered-prices model. [Paper available online by clicking on the title.]
*Obstfeld, Maurice and Ken Rogoff, "Exchange
Rate Dynamics Redux," Journal of Political Economy, Vol. 102
(1995). Dornburch's overshooting model in modern clothes.
*Dornbusch, Rudiger, "Expectations and Exchange Rate Dynamics," Journal of Political Economy, Vol. 24 (1976), pp. 1161-1176. (Reprinted as Chapter 4 in DO.) Dornbusch's celebrated piece on the "overshooting" of the nominal exchange rate in response to a change in the level of the money supply. [Paper available from JSTOR by clicking on the title.]
*Calvo, Guillermo A. (1983). "Staggered prices in a utility-maximizing
framework," Journal of Monetary Economics 12, pp. 383-98. [Reprinted as Chapter 4 in CA1 volume.] An extremely useful continuous-time
formulation of sticky prices, which provides an important building block of the
sticky-prices model of Chapter 8.
Rogoff, Kenneth (2002). "Dornbusch's overshooting model after twenty-five years," Mundell-Fleming Lecture at the IMF's Second Annual Research Conference. [Paper available from the IMF by clicking on the title.]
Mussa, Michael (1986). "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications." Carnegie-Rochester Conference Series on Public Policy 25, pp. 117-213.
Chari, V.V., Patrick K. Kehoe, and Ellen R. McGrattan. (2002). "Can sticky price models generate volatile and persistent real exchange rates? Review of Economic Studies 69, pp. 533-563. [Version available from the NBER by clicking here.]
Barro, Robert J. and Herschel I. Grossman (1971), "A
general disequilibrium model of income and employment," American
Economic Review 61, pp. 82-93. a pioneering
contribution on disequilibrium models that underlies the sticky wage model of
Chapter 8 in VE.
Cespedes, Luis, Roberto Chang, and
Andres Velasco, "Balance
Sheets and Exchange Rate Policy," NBER Working Paper No. 7840 (August
2000). Revisits the
Mundell-Fleming results in the presence of balance sheets effects.
*VE, Chapter 9: Interest Rate Policy
*Calvo, Guillermo A., and Carlos A. Vegh, "Fighting Inflation with High Interest Rates: The Small Open Economy Case under Flexible Prices," Journal of Money, Credit and Banking, Vol. 27 (1995), pp. 49-66. An alternative analytical framework to think about interest rates as policy instruments. [Paper available online from JSTOR by clicking on the title.]
*Calvo, Guillermo A., "Interest Rate Rules, Inflation Stabilization, and Imperfect Credibility: The Small Open Economy Case," NBER Working Paper No. 13177 (June 2007). Analyzes the real effects of interest rate rules in a context of imperfect credibility. [Paper available online from the NBER by clicking on the title.]
*Vegh, Carlos A.,
"Monetary Policy,
Interest Rate Rules, and Inflation Targets," in Fernando
Lefort and Klaus Schmidt-Hebbel, eds., Indexation,
Inflation, and Monetary Policy (Santiago, Chile: Banco Central de Chile, 2002),
pp. 151-183. [Issued as NBER Working Paper No. 8684 (December 2001).] Establishes
equivalences between policy rules based on money, nominal interest rates and
real interest rate rules. [Paper available online by clicking on the
title.]
*Auernheimer, Leonardo, "Monetary Policy Rules, the Fiscal Theory of the Price Level and (Almost) All that Jazz: In Quest of Simplicity," forthcoming in Carmen, Reinhart, Carlos Vegh, and Andres Velasco, Money, Crises, and Transition: Essays in Honor of Guillermo Calvo (MIT Press, 2008).
Sargent, Thomas, and Neil Wallace, "'Rational'
Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply,"
Journal of Political Economy, Vol. 83 (1975), pp. 241-254. Shows
that, under rational expectations, interest rate targeting leads to price level
indeterminacy. [Paper available online from JSTOR by clicking on the
title.]
Calvo, Guillermo A., and Carlos A. Vegh, "Disinflation
and Interest-bearing Money," The Economic Journal, Vol. 106
(1996), pp. 1546-1563. Interest rate policy in a staggered-prices,
closed-economy model. [Paper available online from JSTOR by clicking on
the title.]
Reinhart, Vincent, "The Design of an Interest Rate Rule with Staggered
Contracting and Costly Transacting," Journal of Macroeconomics,
Vol. 14 (1992), pp. 663-688. Examines interest rate rules in an optimizing,
staggered-prices model.
Kraay, Aart, "Do
High Interest Rates Defend Currencies during Speculative Attacks?," Journal
of International Economics, Vol. 59
(2003), pp. 297-321. Empirical evidence
on the effectiveness of high interest rates. [Paper available from
ScienceDirect by clicking on the title.]
Drazen, Allan, "Interest Rate Defense against Speculative
Attacks under Asymmetric Information," Carnegie-Rochester
Conference Series on Public Policy,
2000, vol. 53, issue 1, pages 303-348. Interest
rate defense in a signaling model.
Drazen, Allan and Stefan Hubrich, "A Simple Test of the Effect of
Interest Rate Defense," NBER Working Paper No. 12616 (October 2006). An empirical analysis of interest rate
defense in the context of a signaling model. [Paper available
online from the NBER by clicking on the title.]
Lahiri, Amartya and Carlos A. Vegh, "Delaying the Inevitable: BOP Crises and
Optimal Interest Rate Policy," Journal of Political Economy, Vol. 111
(April 2003), pp. 404-424. [Longer
version issued as NBER Working
Paper No. 7734 (June 2000)] Analyzes the effectiveness and optimality
of raising interest rates to defend a currency peg in a Krugman-type model
Flood, Robert and Olivier Jeanne, "An Interest Rate
Defense of a Fixed Exchange Rate?" Journal of International Economics,
Vol. 66 (2005), pp. 471-484. Interest rate defense in the
Krugman-Flood-Garber model of currency crisis. [IMF Working Paper
available from the IMF by clicking on the title.]
Hnatkovska, Viktoria, Amartya Lahiri, and Carlos A. Vegh, "Interest Rates and the Exchange Rate:
A Non-Monotonic Tale," NBER Working Paper No. 13925 (2008)). [Paper available from NBER by clicking on the
title.] Interest rate defense under flexible exchange rates in quantitative
framework.
Flood, Robert P., and Andrew K. Rose, "Uncovered Interest Parity in Crisis: The Interest Rate Defense of 1990s,"( mimeo, Berkeley and IMF, 2001). [Paper available from Andy Rose's home page by clicking on the title.] Provides evidence on the effectiveness of an interest rate defense.
10. FINANCIAL AND BALANCE OF PAYMENTS CRISES
*Vegh, Carlos A., "Balance of Payment Crises" (Chapter 9 in V volume).
*Talvi, Ernesto, "Exchange rate-based stabilization with endogenous fiscal response," Journal of Development Economics, Vol. 54 (1997) pp. 59-75. Analyzes the fiscal effects of the initial consumption boom.
*Kaminsky, Graciela and Carmen M. Reinhart, "The Twin Crises: The Causes of Banking and Balance of Payments Problems," American Economic Review, Vol. 89 (1999), pp. 473-500. Stylized facts on banking and balance of payments crises. [Paper available from JSTOR by clicking on the title.]
Kaminsky, Graciela, Carmen M. Reinhart, and Carlos A. Vegh, "The
Unholy Trinity of Financial Contagion," Journal of Economic Perspectives,
Vol. 17 (Autumn 2003), pp. 51-74. How
crises spread across countries. [Paper available from
JSTOR by clicking on the title.]
Calvo, Guillermo, Alejandro Izquierdo, and Ernesto Talvi, "Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises," NBER Working Paper No. 12101 (March 2006). How countries recover from financial crises without either domestic or foreign credit. [Paper available from NBER by clicking on the title.]
Mendoza, Enrique G., and Marco Terrones, "An Anatomy of Credit Booms: Evidence from Macro Aggregates and Micro Data," NBER Working Paper No. 14049 (May 2008). An empirical analysis of credit booms and potential crises. [Paper available from NBER by clicking on the title.]
Reinhart, Carmen M., and Kenneth Rogoff, "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Paper No. 13882 (March 2008). [Paper available from NBER by clicking on the title.]
Reinhart, Carmen M., and Kenneth Rogoff, "The Aftermath of Financial Crises," NBER Working Paper No. 14656 (January 2009). [Paper available from the the NBER.]
Rose, Andrew K., and Mark M. Spiegel, "Cross-Country Causes and Consequences of the Crisis: An Update," NBER Working Paper No. 16243 (July 2010). [Paper available from the the NBER.] An analysis of the causes behind the Great Recession of 2008-2009.
Frankel, Jeffrey A., "Monetary Policy in Emerging Markets: A Survey," NBER Working Paper No. 16125 (June 2010). A good survey of many policy issues relevant for emerging markets.