International Finance

EMEC027S6 (30 credits)

Lecturer: Anne Sibert

Aims

The aim of this course is to provide a general introduction to international finance. The monetary approach will be used to study exchange rates, the balance of payments, speculative bubbles and attacks, and target zones.

Objectives

On successful completion of this course, students should be able to demonstrate that they:

• understand the mechanics of balance of payments accounting;that they can record transactions and construct the balance of payments; they understand the relationship between the balance of payments accounts and the national income accounts;
• understand purchasing power parity, covered interest parity and uncovered interest parity;
• are able to analyse the effects of monetary and fiscal policy in an open economy;
• understand how market participants’ belief about future monetary policy affect the current exchange rate;
• understand how speculative attacks on a fixed exchange rate can occur;
• understand articles on exchange rates and the balance of payments in newspapers such as the Financial Times and Wall Street Journal;
• can solve first-order linear difference equations with constant coefficients.

Reading list and Lecture Schedule

Detailed lecture notes will be handed out before each class. This is the primary reading for the course. All other reading is optional. Exam questions will be based on the lectures and lecture notes; they will not cover the optional reading.

The following book is highly recommended:

Copeland, Laurence S, Exchange Rates and International Finance, Prentice-Hall, Third Edition, 2000 is highly recommended. It is on reserve at the library and is available from Amazon.co.uk

• Week 1 Balance of Payments Accounting

Optional reading: (highly recommended)

Fieleke, Norman S, "What is the Balance of Payments," Federal Reserve Bank of Boston Special Report No. 3, Nov. 1996

It is perhaps the most widely used teaching article on the balance of payments. It does not, however, discuss the recent changes to balance of payments conventions. For a discussion of these see:

Bach, Christopher L, "U.S. International Transactions, Revised Estimates for 1982-98," Survey of Current Business, July 1999.

The following article also discusses the recent changes:

Warnock, Francis E, "U.S. International Transactions in 1999," Federal Reserve Board Bulletin, May 2000.

Another useful article that incorporates the recent changes and discusses the UK balance of payments is

Jones, Paul, "UK Balance of Payments" (the first two and a half pages)

• Week 2 The Foreign Exchange Market and Arbitrage Conditions

Optional reading:

Copeland, Laurence S, Exchange Rates and International Finance, Prentice-Hall, Third Edition, 2000, sections 2.2, 2.4, 3.1 - 3.4

Bank for International Settlements, "Triennial Central Bank Survey of Foreign Exchange and Derivative Market Activity," 1998

This is the main source of foreign exchange data. A good source on how the foreign exchange market works is:

Cross, Sam Y, "All About the Foreign Exchange Market in the United States," Federal Reserve Bank of New York.

• Week 3 The Mundell-Fleming Model

Optional reading:

Copeland, sections 4.1.1, 4.1.2 (pp. 111 - 119, 128 - 130), 6.1.1 (p. 177)

Some online sources for the IS - LM model are

http://cepa.newschool.edu/het/essays/keynes/hickshansen.htm
http://web.mit.edu/krugman/www/trioshrt.html
http://www.cepr.org/press/dp2203.htm

• Week 4 The Mundell-Fleming Model

An on-line interactive version of the model:

• Week 5 In-Class Exam
  
• Week 6 A Simple Monetary Approach Model

Optional reading: Copeland, section 4.1.2 (pp. 119 - 128)

• Week 7 The Monetary Approach to the Balance of Payments: Perfect Foresight
  
• Week 8 The Monetary Approach to the Balance of Payments: Rational Expectations

Optional reading: Copeland, section 12.2

• Week 9 Speculative Attacks

Optional reading: Copeland, sections 16.1

• Week 10 Target Zones

Optional reading: Copeland, sections 15.1 - 15.3, 15.5 - 15.9

The following paper is more technical than the lecture. But, it has a very readable non-technical part.

Krugman, Paul (1991), "Target Zones and Exchange Rate Dynamics," Quarterly Journal of Economics 106, 669 - 82.

Svensson, Lars (1992), "An Economic Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives 6(4), 119 - 44.

A list of literature on target zones

Teaching arrangements

During the course, there will be a weekly lecture combined with a class in which students present their solutions to that week’s problem set.

Assessment

An in-class exam in week 5 based on the International Finance part of the course will count for 10% of the course unit mark. In June, there will be a three-hour formal examination based on Parts 1 and 2 of the Financial Market Analysis course, which will count for 80% of the course unit mark.