International Macroeconomics
2013
Matthieu Bussière and Jean Imbs
Part I
Jean Imbs
This half class purports to review recent developments in international macroeconomics.
The range of topics we cover corresponds to recent advances in the field, and is meant to
give you a flavor of the current state of the art in international macro.
You will need a working knowledge of macroeconomic theory, corresponding to the
level of Blanchard and Fischer’s Lectures in Macroeconomics, or Romer’s Advanced
Macroeconomics. There is no obvious reference textbook for the topics we will be
covering, although Obstfeld and Rogoff’s Foundations of International Economics (OR)
is a close (if somewhat old) approximation.
Virtually all lectures will be based on research articles, which in most cases will be either
published or available online.
TOPICS
1. Current Account
Obstfeld-Rogoff, Foundations of International Economics: Chapters 1, 2, and 3.
1.1. The intertemporal approach to the current account
1.2. Dynamics of the current account
1.3. The intRAtemporal approach to the current account: The transfer problem (and
calibration)
Calibration
-*Obstfeld, Maurice, and Kenneth Rogoff (2005). “The Unsustainable US Current
Account Position Revisited”, Brookings Papers on Economic Activity , 2005 issue 1, 67123. http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1063&context=iber/cider
2. Real Exchange Rates
*Obstfeld – Rogoff, Foundations, Chapter 4
A. Evidence – the PPP Puzzle
-Rogoff K. "The Purchasing Power Parity Puzzle", Journal of Economic
Literature Vol. 34, No. 2. (Jun., 1996), pp. 647-668;
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-*Imbs, J., H. Mumtaz, M. Ravn, and H. Rey. “PPP Strikes Back: Aggregation and the
Real Exchange Rate”, Quarterly Journal of Economics, February 2005.
-Imbs, J., H. Mumtaz, M. Ravn, and H. Rey. ““Non-Linearities and Real Exchange Rate
Dynamics”, Journal of the European Economic Association, April-May 2003, 1 (2-3)
-Charles Engel, “Accounting for US Real Exchange Rate Changes”, Journal of Political
Economy 107(3), June 1999, 507-538.
-Alan M. Taylor, “Potential Pitfalls for the Purchasing-Power Parity Puzzle? Sampling
and Specification Biases in Mean-Reversion Tests of the Law of One Price,”
Econometrica 69(2) (March 2001): 473-98.
B. Theory
-Obstfeld M. and K. Rogoff, "The Six Major Puzzles in International
Macroeconomics: Is There a Common Cause?", NBER Macro Annual 2000,
also NBER working paper 7777.
-Ghironi F. and M. Melitz, "International Trade and Macroeconomic Dynamics
with Heterogeneous Firms," Quarterly Journal of Economics, Aug 2005
-Atkeson, A. and A, Burstein, "Trade Costs, Pricing to Market, and
International Relative Prices", forthcoming, American Economic Review, 2008
-Gopinath G., P-O. Gourinchas and C-T. Hsieh, "Cross Border Prices, Costs and
Mark-ups", mimeo UC Berkeley, July 2008.
-Paul R. Bergin and Reuven Glick, “Endogenous Tradability and Macroeconomic
Implications,” Federal Reserve Bank of San Francisco, working paper 2003-09, (revised
Feb 2006). An earlier version was issued as NBER wp 9739.
3. Nominal Exchange Rates and the Forward Premium Puzzle
-*R. Meese and K. Rogoff, “Empirical Exchange Rate Models of the 70s: Do They Fit
Out Of Sample?”, Journal of International Economics, 1983
-*Gourinchas, P.O. and H. Rey, “International Financial Adjustment”, Journal of Political
Economy, August 2007.
-Charles Engel, Nelson Mark and Ken West, “Exchange Rate Models Are Not As Bad As
You Think”, NBER Macro Annual 2007.
-Engel, C. and K. West, "Exchange Rates and Fundamentals", Journal of
Political Economy, 113, p485-517, 2005.
-Bacchetta P. and E. van Wincoop, "Can Information Heterogeneity Explain the
Exchange Rate Determination Puzzle?", American Economic Review, June
2006
- Bacchetta, P and Eric van Wincoop,"Random Walk Expectations and the Forward
Discount Puzzle" (January 2007), American Economic Review, Papers and Proceedings,
97, 346-350, May 2007.
4. International Risk Sharing & Portfolio Diversification
*Obstfeld and Rogoff, Foundations, chapter 5.
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A. Complete Markets and Risk Sharing
-Backus D. and G. Smith, "Consumption and Real Exchange Rates in Dynamic
Economies with Nontraded Goods", Journal of International Economics, 25,
1993.
-Brandt M., Cochrane J. and P. Santa Clara, "International Risk Sharing is
better than you think (or exchange rates are much too smooth) ", Journal of
Monetary Economics, May 2006.
-Lewis K. (1996), "What can explain the apparent lack of consumption risk
sharing?" Journal of Political Economy 104 (April): 267-97.
-Obstfeld, M., 1994, “Evaluating Risky Consumption Paths: The Role of Intertemporal
Substitution”, NBER Technical Working Paper 120.
-Fratzscher, M. and J. Imbs, forthcoming, Finance, Institutions and Risk Sharing in
International Portfolios, Journal of Financial Economics .
B. International Portfolios
-Cole H. and M. Obstfeld, "Commodity Trade and International Risk Sharing:
How much do Financial Markets Matter?", Journal of Monetary Economics 28
(August): 3-24, 1991.
-French K. and J. Poterba, 1991, "Investor diversification and international
equity markets", American Economic Review 81, 222-226.
-Baxter M. and U. Jermann, 1997, "The international diversification puzzle is
worse than you think", American Economic Review, 87(March) and the
appendix.
-Heathcote, J. and F. Perri, "The International Diversification Puzzle is not as
bad as you think", mimeo NYU Stern, Aug 2004.
-Lewis K., "International Home Bias in International Finance and Business
Cycles", NBER WP #6351, January 1998, or with the title "Trying to Explain
Home Bias in Equities and Consumption" Journal of Economic Literature 37,
June 1999, 571-608.
-Lewis, K., “Why do stocks and consumption imply such different gains from
international risk sharing?”, JIE 2000
-Sorensen, B., Yi-Tsung Wu, Oved Yosha, and Yu Zhu, \Home Bias and International
Risk Sharing: Twin Puzzles Separated at Birth." Journal of International Money and
Finance, Vol. 26, June 2007, 587{605.
5. Capital Flows
Obstfeld and Rogoff, Foundations, Chapters 6 and 7
-*Gourinchas P-O. and O. Jeanne "The Elusive Gains from International
Financial Integration", Review of Economic Studies, July 2006.
-Gourinchas P-O. and O. Jeanne, "Capital Flows to Developing Countries: the
Allocation Puzzle", mimeo UCB, April 2008.
-Benhima, K., 2008, “A Reappraisal of the Allocation Puzzle through the Portfolio
Approach”, mimeo CREST.
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- Abiad, A., D. Leigh and A, Mody, “Financial Integration, Capital Mobility, and Income
Convergence”, Economic Policy, forthcoming.
- Engel, Charles, and John Rogers (2008), “Expected Consumption Growth from CrossCountry Surveys: Implications for Assessing International Capital Markets,” mimeo.
http://www.ssc.wisc.edu/~cengel/WorkingPapers/ConsumptionGrowth06-15-08.pdf.
Part II
Matthieu Bussière
The second part of the course will tackle: (i) the literature on economic and financial
crises, (ii) the issue of global imbalances; and (iii) recent advances in the field of pricing
and invoicing of international trade, as well as an exploration of recent work on exchange
rate elasticities and on the determinants of real trade flows (including the issue of the
“Great Trade Collapse”).
1. Economic and Financial Crises
Non-technical / institutional reading:
Reinhart, C. and K. Rogoff (2009), This Time is Different, Princeton University Press.
Bussière, M. (2013), “In Defense of Early Warning Signals”; Banque de France Working
Paper No. 420.
European Central Bank (2012), Report on the First Two Years of the Macro-prudential
Research Network, October 2012.
Glick, R. and M. Hutchison (2011), “Currency Crises”, Federal Reserve Bank of San
Francisco, Working Paper 2011-22.
1.1. Output dynamics: implications of crises:
Cerra, V. and S. Chaman Saxena (2008), "Growth Dynamics: The Myth of Economic
Recovery", American Economic Review, Vol.98, No.1, pp.439-57.
Bordo M. and J. Haubrich (2012), “Deep Recessions, Fast Recoveries, and Financial
Crises: Evidence from the American Record,” NBER Working Paper 18194, June 2012.
Milesi-Ferretti, G. and A. Razin (1998), "Sharp reductions in current account deficits An
empirical analysis," European Economic Review, Elsevier, vol. 42(3-5), pages 897-908,
May.
1.2. Modeling crises
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Krugman, P., (1979), “A Model of Balance-of-Payments crises”, Journal of Money,
Credit and Banking, Vol. 11 (August), pp. 311-25.
Obstfeld, M. (1994), "The Logic of Currency Crises," NBER Working Papers 4640.
Obstfeld, M. (1986). “Rational and self-fulfilling balance-of-payments crises.” American
Economic Review 76 (1), pp. 72-81.
1.3. Is this time different? Predicting crises
Berg, A. and C. Pattillo (1999a), “Are Currency Crises Predictable? A Test”, IMF Staff
Papers; 46(2), June 1999, pp. 107-38.
Berg, A. and C. Pattillo (1999b), “Predicting Currency Crises: The Indicators Approach
and an Alternative”, Journal of International Money and Finance; 18(4), pp. 561-86.
Bussière, M. (2007), “Balance of Payment Crises in Emerging Markets - How Early were
the “Early” Warning Signals?”, forthcoming Applied Economics, 2013.
Bussière, M. and M. Fratzscher (2006), “Towards a New Early Warning System of
Financial Crises”, Journal of International Money and Finance, 25(6), pp. 953-973.
Bussière, M. and M. Fratzscher (2008), “Low Probability, High Impact: Policy Making
and Extreme Events”, Journal of Policy Modeling, 30(1), pp. 111-121.
Demirguc-Kunt, A., and E. Detragiache (1998), “The Determinants of Banking Crises in
Developing and Developed Countries”, IMF Staff Papers, 45(1), March 1998.
Frankel, J. and A. Rose (1996), “Currency Crashes in emerging Markets: an Empirical
Treatment”, Journal of International Economics, 41, pp. 351-66.
Frankel, J. and G. Saravelos (2010), “Are Leading Indicators Useful for Assessing
Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis”, NBER WP
no.16047, June.
Jeanne, O. and P. Masson (2000), "Currency crises, sunspots and Markov-switching
regimes," Journal of International Economics, Elsevier, vol. 50(2), pages 327-350, April.
Kaminsky, G. and C. M. Reinhart (1999), “The Twin Crises: The Causes of Banking and
Balance of Payments Problems,” American Economic Review, Vol. 89(3), 473-500.
Kaminsky G. L., S. Lizondo and C. M. Reinhart (1998), “Leading Indicators of Currency
Crises,” IMF Staff Papers, 45, No. 1, pp. 1-48.
Rancière, R., Aaron Tornell and Frank Westermann, 2008. "Systemic Crises and
Growth," The Quarterly Journal of Economics, vol. 123(1), pages 359-406.
Rancière, Romain, Aaron Tornell, and Frank Westermann, 2006, “Decomposing the
Effects of Financial Liberalization: Crises vs. Growth”, NBER Working Paper No.
12806.
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Rose, A. K. and M. Spiegel (2009), “Cross-Country Causes and Consequences of the
2008 Crisis: Early Warning”, CEPR Discussion Paper No. 7354, July 2009.
1.4 Contagion
Kaminsky, G. and C. Reinhart (2000), “On crises, contagion, and confusion”, Journal of
International Economics, Volume 51, Issue 1, June 2000, Pages 145–168.
Masson, P. (1998), “Contagion-Monsoonal Effects, Spillovers, and Jumps Between
Multiple Equilibria”, IMF Working Papers 98/142.
Van Rijckeghem, C. & B. Weder (2001), "Sources of contagion: is it finance or trade?,"
Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
2. Global Imbalances
Non-technical / institutional reading:
Mann, Catherine L. (2002), "Perspectives on the U.S. Current Account Deficit and
Sustainability," Journal of Economic Perspectives, American Economic Association, vol.
16(3), pages 131-152, Summer.
Bracke, T., M. Bussière, M. Fidora and R. Straub (2010), “A Framework for Assessing
Global Imbalances”, The World Economy, Wiley Blackwell, vol. 33(9), pages 11401174, 09.
De Mello, L. and P. C. Padoan, 2010. "Are Global Imbalances Sustainable?: Post-Crisis
Scenarios," OECD Economics Department Working Papers 795, OECD Publishing.
2.1 Theory and empirics of global imbalances
Blanchard, O., F. Giavazzi & Filipa Sa (2005), "The U.S. Current Account and the
Dollar," NBER Working Papers 11137.
Bussière, M., M. Fratzscher and G. Müller (2010), “Productivity Shocks, Budget Deficits
and the Current Account”, Journal of International Money and Finance, 29(8), 15621579.
Bussière, M., M. Fratzscher and G. Müller (2006), “Current Account Dynamics in OECD
and EU Acceding Countries – an Intertemporal Approach”, Journal of Economic
Integration, 21(3).
Bussière, M., Y. Kalantzis, R. Lafarguette, and T. Sicular (2013), “Understanding
Household Savings in China: the Role of the Housing Market and Borrowing
Constraints”.
Caballero R., E. Farhi and P-O. Gourinchas, "An Equilibrium Model of Global
Imbalances and Low Interest Rates", American Economic Review, 98(1), March 2008.
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Chinn, M. & Prasad, E. (2003), "Medium-term determinants of current accounts in
industrial and developing countries: an empirical exploration," Journal of International
Economics, Elsevier, vol. 59(1), pages 47-76.
Gourinchas, P.O. and H. Rey (2007), “From World Banker to World Venture Capitalist:
The US External Adjustment and The Exorbitant Privilege”, in "G7 Current Account
Imbalances: Sustainability and Adjustment", Richard Clarida, editor, The University of
Chicago Press, 2007, pp. 11-55).
Mendoza, E., V. Quadrini and V. Rios-Rull, "Financial Integration, Financial Deepness
and Global Imbalances", NBER WP 12909, February 2007.
Nason, J., J. Rogers, (2006), "The present-value model of the current account has been
rejected: Round up the usual suspects," Journal of International Economics, Elsevier, vol.
68(1), pages 159-187, January.
2.2 Global imbalances: the debate on valuation effects
Curcuru, S., T. Dvorak, and F. Warnock, forthcoming. Decomposing the U.S. External
Returns Differential. Journal of International Economics, Volume 80, Issue 1, January
2010, Pages 22–32.
Curcuru, S., C. Thomas, and F. Warnock, (2009), Current Account Sustainability and
Relative Reliability, in J. Frankel and C. Pissarides (ed) NBER International Seminar on
Macroeconomics 2008. University of Chicago Press, pgs 67-109.
Curcuru, S., T. Dvorak, and F. Warnock (2008), Cross-Border Returns Differentials.
Quarterly Journal of Economics 123(4): 1495–1530.
Gourinchas, P.-O., H. Rey and N. Govillot, 2010. "Exorbitant Privilege and Exorbitant
Duty," IMES Discussion Paper Series 10-E-20, Institute for Monetary and Economic
Studies, Bank of Japan.
Warnock, F., and V. Warnock, forthcoming. International capital flows and U.S. interest
rates. Journal of International Money and Finance.
3. International Trade: pricing, invoicing, trade flows
Non-technical / institutional reading:
Marazzi, M., N. Sheets and R. Vigfusson, and J. Faust, J. Gagnon, J. Marquez, R. Martin,
T. Reeve and J. Rogers (2005), “Exchange Rate Pass-Through to U.S. Import Prices:
some New Evidence”, Board of Governors of the Federal Reserve System, International
Finance Discussion Paper No. 832.
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3.1 Exchange rate pass-through
Burstein, A. and G. Gopinath (2013), “International Prices and Exchange Rates”,
Working Paper 18829.
Bussière, M. (2012), “Exchange Rate Pass-Through to Trade Prices: the Role of Nonlinearities and Asymmetries”, Oxford Bulletin of Economics and Statistics, forthcoming
(the paper is also available in the ECB working paper series).
Bussière, M., S. delle Chiaie and T. Peltonen (2013), “Exchange Rate Pass-Through in
the Global Economy”, Banque de France working paper No. 424.
Campa J. and L. Goldberg (2005), “Exchange rate Pass Through into Import Prices”,
Review of Economics and Statistics, vol. 87(4), pp. 679-690.
Dornbusch, R. (1987), “Exchange Rates and Prices”, American Economic Review, vol.
77(1), March, pp. 93-106.
Gopinath, G., O. Itskhoky and R. Rigobon (2010), “Currency Choice and Exchange Rate
Pass-through”, American Economic Review, American Economic Association, vol.
100(1), pages 304-36, March.
3.2 Exchange rate elasticities and determinants, real trade flows, “Great Trade
Collapse”
Alessandria, G., J. P. Kaboski, and V. Midrigan. 2010. “The Great Trade Collapse of
2008-09: An Inventory Adjustment?”, IMF Economic Review 58(2): 254-294.
Bénassy-Quéré, A., Y. Decreux, L. Fontagné and D. Khoudour-Castéras (2009),
Economic Crisis and Global Supply Chain. CEPII Document de Travail 2009-15.
Bussiere, M., G. Callegari, F. Ghironi, G. Sestieri and N. Yamano (2011), “Estimating
Trade Elasticities: Demand Composition and the Trade Collapse of 2008-09”; NBER
Working Paper #17712, December 2011.
Bussière, M., A. Chudik and G. Sestieri (2009), “Modeling Global Trade: Results from a
GVAR Model”, ECB Working Paper No. 1087, September 2009.
Eaton, Jonathan, Samuel Kortum, Brent Neiman, and John Romalis. 2011. “Trade and the
Global Recession.” NBER Working Paper 16666.
Houthakker, Hendrik S., and Stephen P. Magee. 1969. “Income and Price Elasticities in
World Trade”, Review of Economics and Statistics 51(2): 111-125
Levchenko, A., L. Lewis, and L. Tesar. (2010), “The Collapse of International Trade in
2008-9: In Search of the Smoking Gun”, IMF Economic Review 58(2): 214-253.