Trinity College, Department of Economics
Beth V. Yarbrough and Rober M. Yarbrough. The World Economy: Open-Economy Macroeconomics and Finance, 7th edition. Mason, OH: Thomson-South-Western, 2006. You will also have to purchase a set of reading materials ( RM ) especially prepared for this course. The set of RM is available at the econ. office in Williams Memorial (see Adrienne Quinn.)
This course is designed to provide students with a basic understanding of an economy's trade in financial assets as well as the impact of these transactions on key macroeconomic variables and policies. In so doing, students are exposed to major theoretical and policy issues faced by business firms, the government, and individual investors in their international financial transactions. The techniques and concepts developed in this course will help you understand the major financial problems and issues facing an open economy. For instance, they provide insights into some of the following questions: How does the forward exchange market contribute to reducing the risk of investing in foreign assets? What is a foreign currency option, and how does it differ from a futures contract? Does the law of one price hold over time in its relative form and does it matter? Why is monetary policy relatively ineffective in a financial regime characterized by high degrees of capital mobility and currency substitution? Can the industrialized countries coordinate their policies in order to stabilize their exchange rates and economies? Is the world moving towards regional trading blocks such as NAFTA, MERCOSUR, and the EU? Will the euro supplant the dollar as a reserve currency? Have Hedge funds contributed to destabilizing world financial and exchange markets? Is dollarization a good idea for less developed countries such as Ecuador or El Salvador? What are some of the common institutional (and economic) causes of the Mexican peso crisis of 1994-95, the Asian financial and economic crisis, and the Argentine economic and financial meltdown? Did these aforementioned crises constitute a real threat to the stability of the world financial system? More important, is there anything the governments of the world can, or should do, to prevent these crises? And so forth.
The course is divided into five sections. Briefly, the first section introduces the student to the workings of foreign exchange markets and international money markets. The next section examines the money links existing between the United States and the rest of the world as recorded in the balance of payments. Section III begins by developing and modifying a simple macro model to suit the needs of an open economy. It then proceeds to examine the relative effectiveness of fiscal and monetary policy under fixed and flexible exchange-rate systems with varying degrees of capital mobility. Section IV discusses how the economy and the price level adjusts to economic shocks and policy changes. That is, we focus on the transition between the short run and long run. Finally, we examine alternative international monetary regimes and analyze the unique macroeconomic challenges confronting developing and transitional economies.
During the spring term two major exams will be given on dates announced below. The exams will be a combination of short answer, numerical, and analytical problems. Exams will cover the assigned text, lectures, and any handouts or readings given in class. Short quizzes (15 minutes) will be given on alternate weeks. In addition, you will be required to write at least four short critical review papers (3 to 5 pages) on articles assigned in class (most of the articles are from Reading Materials packet). You will also be assigned homework on a regular basis.
The tentative weights and dates of the components of your final grade are as follows:
Weights (%) Dates
Mid-term exam 30 March 12 (W)
Final exam 35 TBA.
Review papers 20 TBA
Homework and quizzes 15
My office is located at Williams Memorial, Rm 312, and I will be available for consultation on T and Th between 10:15 and 11:50 and by appt. I will only accept messages on my phone system (X2487) in the event of an emergency. An emergency constitutes missing a scheduled exam and/or failing to hand in a written review or homework on the scheduled date. Email messages are welcome as long as they pertain to substantive topics related to class material. Un- excused absences will be counted against you in the determination of your final grade. My email at Trinity College is: Miguel.Ramirez@trincoll.edu
I. Currency Markets, Exchange Rates, and the Monetary Approach (approx. 3 1/2 weeks).
1. Week of January 21: Yarbrough, chps. 1 and 2.
2. Week of January 28: Yarbrough, chp. 2.
3. Week of February 4: Yarbrough, chp. 8 and handout on options.
4. Week of February 11: Yarbrough, chps. 8 and 3.
(Friday February 15 is last day to withdraw from Spring Term courses.)
RM: Fischer, "Exchange Rate Regimes: Is the Bipolar View Correct?"; Friedman, "The Case for Flexible Exchange Rates"; Calvo and Mishkin, "The Mirage of Exchange Rate Regimes for Emerging Market Economies.
II. The Balance of Payments (approx. 1 1/2 weeks).
5. Week of February 18: Yarbrough, chp. 3 and 4.
6. Week of February 25: Yarbrough, chp. 4. (Trinity days–no classes on F.)
RM: Hakkio, "Is Purchasing Power Parity a Useful Guide to the Dollar?"; Brown, "The U.S. Trade Deficit: Made in China?"
III. Open Economy Macroeconomics (approx. 3 weeks).
7. Week of March 3: Yarbrough, chps. 4 and 5.
8. Week of March 10: Yarbrough, chp. 6. (Mid-term exam on Wed. March 12.)
(Spring Vacation: March 15 thru March 23.)
9. Week of March 24: Yarbrough, chps. 6 and 7
RM: Whitt, "The Mexican Peso Crisis"; Whitt, "The Role of External Shocks in the Asian Financial Crisis"; Bird, "Coping with, and Cashing in on International Capital Volatility."
IV. Prices and Output in an Open Economy (approx. 2 weeks)
10. Week of March 31: Yarbrough, chps. 7 and 9.
11. Week of April 7: Yarbrough, chps. 9 and 10.
RM: Krugman, "Crises: The Price of Globalization" (handed out in class); Kaminsky, "The Unholy Trinity of Financial Contagion." Edwards, "How Effective are Capital Controls?"
V. Recent Issues in Open-Economy Macroeconomics (approx. 2 weeks).
12. Week of April 14: Yarbrough, chp. 10.
13. Week of April 21: Yarbrough, chp. 11.
14. Week of April 28: Last day of classes Wed. April. 30.
(Reading period begins Th. May 1st.)
RM: Chang, "Dollarization: A Scorecard"; Salvatore, "The Euro: Expectations and Performance"; Stulz, "Should We Fear Derivatives?"