University of Warsaw - Central Authentication SystemYou are not logged in | log in
course directory - help

Makroeconomics of the Open Economy

General data

Course ID: 2400-EM2MGO Erasmus code / ISCED: 14.3 / (0311) Economics
Course title: Makroeconomics of the Open Economy Name in Polish: Makroekonomia Gospodarki Otwartej
Department: Faculty of Economic Sciences
Course groups: (in Polish) Przedmioty obowiązkowe dla II r. studiów licencjackich - Ekonomia Międzynarodowa
ECTS credit allocation (and other scores): 5.00
view allocation of credits
Language: Polish
Type of course:

obligatory courses

Prerequisites (description):

Macroeconomics II, Microeconomics

Short description:

The course is devoted to open-economy macroeconomics issues. The topics cover the main theories of balance of payments, exchange rates as well as long and short run adjustments mechanisms in an open economy. The theoretical concepts will be illustrated with empirical examples. The main objective of this course is to familiarize students with the theory and analytical tools essential for understanding an open economy performance and the macroeconomic policy options. The last part of the course focuses on description of the contemporary, global financial markets, and the evolution of the international monetary system.

Assessment: written exam

Full description:

1. Balance of payments.

The balance of payments structure, double-entry system, basic identities of the balance of payments. Balance of payments equilibrium and the international investment position.

2. Classical model of the open economy

Investment and savings in an open economy and the current account. Impact of the economic policy and the world interest rate changes on the current account and real exchange rate. Twin deficits hypothesis and Feldstein-Horioka puzzle.

3. Intertemporal approach to current account and international capital flows.

Intertemporal consumption and production optimalization and the current account, neoclassical theory of capital flows, cost and benefits of international capital flows, Lucas paradox and global imbalances.

4. Exchange rates and foreign Exchange market

Exchange rate definitions, participants of the foreign exchange market and transactions. Basic instruments, hedging and arbitrage conditions

5. Exchange rate determination in the short run

Interest rate parities and arbitrage, money market equilibrium and exchange rates, the role of expectations and risk.

6. Exchange rate determination in the long run, part I.

Law of one price and purchasing power parity (relative and absolute), long run real equilibrium exchange rate determinants, productivity changes and Balassa-Samuelson effect

7. Exchange rate determination in the long run, part II.

Exchange rate monetary models: monetarist and Dornbusch overshooting model, the monetarist model of balance of payments and devaluation effectiveness

8. Exchange rate policy, part I.

Exchange rate regimes, sterilized and non-sterilized official interventions, interventions’ mechanisms and their effectiveness, the role of asset substitutability

9. Exchange rate policy, part II.

Credibility of exchange rate Policy, Krugman’s target zone model, currency crises models. De jure and de facto exchange rate regimes and „fear of floating” phenomenon.

10. Elasticity approach to the balance of payments – Marshall-Lerner condition.

Exchange rate changes and the current account. Marshall-Lerner condition. The “J-curve” effect. Stability of the foreign exchange market.

11. Multiplier approach to the balance of payments. External and internal equilibrium.

Keynesian approach to balance of payments. Propagation of international shocks under various exchange rate regimes. Swan diagram – external and internal equilibrium problem.

12 Macroeconomic policy in the open economy in the short run

Mundell – Fleming model and the effectiveness of the monetary and fiscal policies depending on capital mobility and exchange rate regime.

13 International monetarny system evolution.

Gold standard, Bretton Woods system and its collapse, the floating exchange rates system. The coordination of macroeconomic policies problem

14 Global capital market.

International monetary system evolution and the capital mobility changes, costs and benefits of financial markets’ internalization, risk aversion and international portfolio diversification, foreign exchange rate efficiency.


Please enlist readings inexpedient for the obtainment of the course credit, distinguishing required from suggested readings, if any are recommended (if the course ends with an exam, the indicated readings constitute the required readings for the exam).

Learning outcomes:

Upon the course completion the student:

-is able to recognize:

o The structure of balance of payments

o The main macroeconomic linkages in an open economy;

o Long and short run adjustments mechanisms in an open economy

-is able to:

o forecast the impact of economic policy changes on the exchange rate;

o provide an explanation of international capital flows;

o analyze short and long run determinants of exchange rate;

o point out the conditions of economic stability

KW01, KW02, KW03, KU01, KU02, KU03, KU04

Assessment methods and assessment criteria:

The lecture ends up with a written exam in the form of open questions. Sine qua non condition for attempting exam is to have a credit on discussions classes. The exam is passed with the score of 50% or more points available during the exam. The final grade is given upon a weighted average of the score from the exam (with weight of 70%) and the points obtained during discussions classes (with weight of 30%).

Classes in period "Summer semester 2020/21" (in progress)

Time span: 2021-02-22 - 2021-06-13
Choosen plan division:

see course schedule
Type of class: Class, 30 hours more information
Lecture, 30 hours more information
Coordinators: Paweł Gierałtowski
Group instructors: Paweł Gierałtowski
Students list: (inaccessible to you)
Examination: Course - Examination
Class - Grading
Lecture - Examination

(in Polish) zdalnie

Course descriptions are protected by copyright.
Copyright by University of Warsaw.