Open Economy Macroeconomics / International Macro

(Econ 472)

Theo S. Eicher
teclass@u.washington.edu
Caster Professor of Economics
http://faculty.washington.edu/te
Department of Economics
Phone: (206) 685-8082
305 Savery Hall, Box 353330
University of Washington
Office: Savery 355
Seattle, WA 98195-3330

Tue/Thurs 12:30-1:20 (reserve a slot

at http://www.econ.washington.edu/user/te/officehours/)
Please do not hesitate to come and see me if you have a problem or if you just
Office Hours:
want to discuss issues arising in the class. I also hold "electronic office hours,"
meaning that emails to teclass@ will be answered by the end of the next scheduled
formal office hour.
Class Web page: http://depts.washington.edu/teclass (username: econ472, password: econ)
Class Blog http://www.econ.washington.edu/user/te/blog/
Section A: https://catalyst.uw.edu/gradebook/te/73633
Class Grades
Section B: https://catalyst.uw.edu/gradebook/te/73634

Course Description
The course presents International Monetary Economics theory and applications. The goal is to
provide the student with a deep understanding of the economic frameworks necessary to analyze
current policy issues. Theories presented in this course cover exchange rate determination,
international arbitrage, as well as monetary and fiscal policy in an open economy. Policy issues
covered include the US trade deficit, the value of the dollar relative other currencies, financial
crises, currency crises, and the economic linkages between countries.
Homework:
The required textbook is "International Economics" by J. Mutti, T.S. Eicher, and M.
Turnovsky (7th Edition, Paperback, Routledge 2009).
The required newspaper for the class is the Wall Street Journal. Here is a link to order the
paper online at a student discount. Online ordering provides the fasted access, the most
efficient ordering, and the best student discount.
Homework problem sets must be completed before class in order for students to participate in
class discussions.
If Case Studies have questions (usually at the very end of the link) you are expected to have
written out answers when you come to class. You may be asked to turn them in and have
them graded as a HOMEWORK.
All homework problem sets must be typed; graphs and equations may be handwritten.
The final presentation must be in slide deck format (e.g., PowerPoint).
You are expected to read the WSJ every day; always before class. If you don't have time for the
entire paper, you must read at least the foreign currency column.
- Go to the Homepage

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 - Click on "Today's Paper" (crucial) in the top menu of the WSJ homepage
- Click on "Money and Investing" in the top menu
- Find the Forex, or Currency Market or Foreign Exchange or Current Account
column (they have different names on different days).
Miscellaneous:
If you have special needs, requests, requirements, please come see me immediately.
I believe in the Honor Code. Students are on their honor not to cheat and to report instances
of cheating that they observe. In exchange, it was a violation of the honor code for professors
to suspect cheating for example, by proctoring exams or refusing to give take-home exams.
Under the honor system students have a twofold obligation: individually, they must not
violate the code, and as a community, they are responsible to see that suspected violations are
reported.
Grading:
Late homework cannot be accepted as answers are posted immediately after class.
If you miss an exam for valid/documented reasons (see Student Handbook), I invite you to talk
to me how to make up the exam.
Your grading is based on
- 70% Quiz/Midterms (10% per quiz, the remainder is allocated equally among
midterms)
- 20% Written homework assignments (the final paper counts as one homework)
- 10% Group presentation
Preparation for Class
A) COMMON MISCONCEPTIONS
Misconception #1: The purpose of classes/assignments is to prepare student for exams.
The purpose of classes and assignments is to achieve command of the material. If you have
command of the material, you will do well on the exams.
Misconception #2: It is the instructor's job to cover the material.
Covering the material is the purpose of the textbook. The textbook is to be read by the student.
The role of the instructor is to help the student grasp the material, to guide students in their
learning, to reinforce essential concepts, and to show how the material can be applied to solve
problems.
Misconception #3: Since students read learning from the book, there's no need to go to the
lectures.
The lectures, the reading, and the homework combine to produce true comprehension. Lectures
orient students in learning the material and allow for practiced applications.

B) HOW DO I SUCCEED?

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A great way to learn economics is to do economics. Actively talking and thinking economics is
crucial to further your economic intuition. One way to do so is to actively participate in class,
where we puzzle through policy applications and real world problems. It is very atypical for
someone to learn economics by simply watching the instructor perform or by reading a book.
I value class participation, but this does not mean I value only correct answers! IF YOU ARE NOT
PREPARED TO ANSWER A QUESTION YOU CAN SIMPLY ANSWER PASS TO DEFLECT A
QUESTION WITHOUT CONSEQUENCE. However, PASSING all the time is a negative signal.
Computers are often helpful in long lecture classes. In interactive classes like Econ 472, the
computer will impede your learning. Think about it this way: if you are typing in an attempt to
capture what's going on, you are depriving yourself of the opportunity to actively think about the
question at hand. I strongly urge you to focus on class interaction and leave the computer in your
backpack.

C) TEACHING PHILOSOPHY
I realize that my teaching philosophy may not be altogether standard, and would like to make
every effort to communicate to you beforehand what to expect. Let me quote from Erich
Fromm's To Have or to Be where he provides a good example of the type of learning I favor.
Fromm distinguishes between a "having" mode (acquiring stuff) and a "being" mode
(experiential living):
Students in the having mode of existence will listen to a lecture, hearing the words and
understanding their logical structure and their meaning and, at best they can write down every
word in their loose-leaf notebooks so that later on they can memorize their notes and thus pass
an examination. But the content does not become part of their own individual system of thought,
enriching or widening it. The student and the content of the lectures remain strangers to each
other, except that each student has become the owner of a collection of statements made by
someone else.
The process of learning has an entirely different quality for students in the being mode. To
begin with, they do not go to a course of lectures as tabulae rasae [Latin for "blank slates"]. The
have thought beforehand about the problems the lectures will be dealing with and have in mind
certain questions and problems of their own. They have been occupied with the topic and it
interests them. Instead of being passive receptacles of words and ideas they listen, they hear and
most important they receive and they respond in an active, productive way. They do not simply
acquire knowledge that they can take home and memorize. Each student has been affected and
has changed: each is different after the lecture than he or she was before it. (E. Fromm, To Have
or to Be," 1978, London: Sphere Books: chapter II

Learning Goals:
Understand and be able to use the terminology of the international macro economy
Understand the fundamental determinants of exchange rate movements

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 Understand alternative approaches to exchange rate regimes and their implications
Be able to analyze the impact of fiscal, monetary and exchange rate policy in the open
economy and their impact on interest, prices, employment and output.
Be able to understand the currency market sections in popular newspapers, their value, lingo,
and representation of current events
Collect, use and interpret economic data to provide a country analysis of international
transactions and economic conditions
Display economic data in a meaningful manner, consistent with economic models to interpret
country performance.
Assess critically the economic content of newspaper and journal articles
Be able to express ideas to others visually, verbally, and in writing
Contribute to live analysis of economic puzzles using arguments rooted in economic models.

Important Notices:
If you had problems downloading readings/case studies, please send me an email asap,
THANK YOU!
All homework assignments are links that you can reach from this web page.
Please note that I select case studies for their educational content, NOT according to
their publication date. If a case study may strike you as out of date please keep in mind
that these applications are meant to teach you using real world situations, not inform you
about current events.
THE OUTLINE IS PRELIMINARY AND SUBJECT TO CHANGE. PLEASE CHECK
BEFORE EVERY CLASS!

Class Outline
Date Topic And Key Teaching Points
April 2 Introduction
Understanding the Syllabus
and the Course
April 4 Essential Terminology
Balance of Payments
Exchange rate, Markets,
Reading Assignment and Written
Assignments due.
IE CH 1
IS/LM REVIEW (not comprehensive)
For every class, Read&Print the most
recent FX GLOBAL CALL column in
the WSJ (the most recent one usually
shows the prior day's date).
You find the column in this WSJ link.If
the link does not work for you,
- go homepage (www.wsj.com )
- find the SEARCH on the top right
- type "FX GLOBAL CALL" (include
quotation marks)
IE Ch 12 and 13 (up to page p390)
Why Real (Effective) Exchange Rates?
Nominal vs Real Effective Exchange
Rates

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 Regimes The Value of the Yuan
Case Study 1 (Who is in charge of US
Interest Rates?)
April 9 Effect of Exchange Rate on the IE Ch 13 (p392-end)
Economy Marshall Learner (Video)
Marshal Learner Condition Did Chinas Central Bank Take Your
Job? (Radio)
J-Curve Case Study 1 (Rupee and the J-Curve)
Case Study 2 (Crisis and the J-Curve) -
Voluntary
April History of Exchange Rate Regimes IE Ch 21
11 Gold Standard (Pros and Cons) Effects of UK ending the Gold
Humes Species Flow Standard: FDR follows (youtube)
Mechanism Case Study 1 (Nixon Ends Bretton
Woods)
Bretton Woods Case Study 2 (Gold Standard & Your
Wallet) - Voluntary
Homework 1 (J Curve) due
Solution to Homework 1
April The Simplest Small Open Economy IE Ch 14 (skip section on flexible
16 Model exchange rates)
Assumptions/Implications Case Study 1 (Japanese Piggy Bank)
Empirical Evidence Case Study 2 (Getting Tough Wont
Work) - Voluntary)
Fiscal / Monetary Policy
Implications
April The Large Open Economy IE Ch 14, pages 449-454
18 Assumptions/Implications Case Study 1 (When China Sneezes)
Comparison of Multipliers Case Study 2 (Mercantilism)
Case Study 3: East Grows, West
Policy Implications Consumes
Homework 2 due
Solution to HW2
April I) Paradise Lost IE Ch 15 pages 435-top of 443
23 The long term equilibrium Is your IPod unpatriotic? (youtube)
Expenditure Switching & Trade Wars and Buy
Expenditure & Reducing American(youtube)
The Price of Austerity
Case Study 1: )The New New Thing:
Fiscal Devaluation)
Case Study 2: (Consequences of cuting
the wrong segment of "G" to reduce
trade deficits)
Case Study 3: (Tough Love make

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 sure to read Simon Johnsons article!) -
Voluntary

II) Flexible exchange rates IE Ch 14 p. 422-426

Homework 3 due
Solution to HW3
April Who Needs Policy? The Monetary IE Ch 14 pages 443-446
25 Approach to the Balance of Case Study (Basic Instincts)
Payments Homework 4 due
Non Sterilization Solution to HW 4
April Midterm I (1 hour, 50 minutes)
30
May 2 International Capital Markets IE Ch 16 up to p486
Overview IE Ch 16 p486-end
Billion Dollar Day (video) Case Study (Technical Analysis)
Homework 5 due
Assignment of presentation Graphs for Article in homework 5
groups Solution to Homework 5
May 7 Modeling International Capital IE Ch 17
Markets Carry Trade (also read the WSJ link)
Interest Parity & Capital Case Study 1 (Mother of all Carry
Account Trades)
External Balance (BP = 0) Case Study 2 (Contageon)
Case Study 3 (Thawing Dollars) -
External Balance & IS/LM Voluntary
May 9 Mundell Fleming Model: Fixed IE Ch 18
Exchange Rates Why Greece Is Struck With The Euro?
Goods/ Financial Markets, Case Study 1 (Greece vs California)
External/Internal Balances Case Study 2 (EU and Country Risk)
Case Study (Chinas Policy Options) -
Fiscal/Monetary Policy Voluntary
May Mundell Fleming Model: Flexible IE Ch 19 up to p572
14 Exchange Rates Case Study 1 (Das Kapital)
Goods Market, Financial
Market, External & Internal
Balance

Fiscal and Monetary Policy

May I) Mundell Fleming Model: Large IE Ch 19 p572-end
16 Open Economy Beggar Thy Neighbor
Currency Wars Currency Wars
Case Study 1: Currency Wars
Case Study 2: Why Fear Currency
Wars?

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 II) Price Adjustments in the Case Study 3 (The $ at 1.50 euro) -
Mundell Fleming Model Voluntary
Sticky Prices Case Study 4 (Eurozone/Sticky Prices)
Voluntary
May Price Flexibility IE Ch 20 up to p610
21 Purchasing Power Parity Case Study 1 (Bunfight)
Case Study 2 (Mac Sizzling)
Law of One Price
May Currency Crises IE Ch 23 / Case Studies: In the book
23 Speculative Attacks reading
Case Study (Thai Speculative Attack)
Second/Third Generation Crisis
Models
May Midterm II (1 hour, 50 minutes)
30
June 4 Mundell Fleming Model: Real Sample Presentation (without
World Applications commentary)
Presentations Greece /Iceland Currency Crisis Links (web link)
June 6 Mundell Fleming Model: Real Sample Presentation (without
World Applications commentary)
Presentations Estonia /Ecuador Currency Crisis Links (web link)
June 7 Paper due by 5pm Paper must be submitted in electronic
format to teclass@u.washington.edu.
I cannot except files that are not in
PDF format

Presentation Guidelines

1. The presentation is designed to apply the Mundell Fleming Model to the real world.
2. Each country is covered by two groups. One group covers the pre crisis events; the other
group covers post crisis events.
3. Each group presents for 25 minutes to leave room for questions.
4. Presentations must show each step of countrys economic crisis using the Mundell Fleming
model. This requires COLLECTION AND PRESENTATION of monthly, quarterly, and
annual data on all variables that are important in the Mundell Fleming model
(i.e., REAL values of exchange rates, interest rates, income, money supply, and all
aggregate demand components, the key BOP components etc ) to correlate the movements
of these variables with the model.
5. Good places to start your research are the reference desk at the library and the IFS
(International Financial Statistics database) or via the class website's links.

Structure of the Presentation

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1. DATA. First deliver a succinct account/outline of the key economic conditions / data in
either pre or post crisis (depending on the assignment). This data must include all variables
necessary for the Mundell Fleming model (5 min)
2. ANALYSIS. Second, analyze the economic performance using the Mundell Fleming
Model (10 min)
3. POLICY. Third, outline which policy measures were (or were not) taken, how the data
changed in response to policies, utilizing the Mundell Fleming Model (5 min)
4. FORECAST. Finally, present a forecast for the country, including policy
recommendations, as visualized by the Mundell Fleming model (5 min)

A key learning component of the group work is the discussion within your group. You must
work together in synthesizing ideas and graphs, so that one unified picture emerges for the class,
while parts 1-5 remain clearly distinguishable.

Paper Guidelines

Please compose a paper, double spaced, about 5 typed pages long, to cover a currency crisis (pre
and post) of one of the countries that we discussed during the presentations part of the
course. The country you cover in your paper cannot be the one that you presented to the class.
The paper is again an application of the Mundell Fleming Model. The Paper guidelines are
identical to the presentation guidelines above. This is your chance to show that you can apply
the theory to the practice!