Makroeconomics of the Open Economy

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.

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