Econ 850 Reading List
1. Exchange Rates Basics
*Lucas, Robert E, Jr., 1982, “Interest Rates and Currency Prices in a Two-Country World,”
Journal of Monetary Economics, Vol. 10 (3). p 335-59. The first half of the paper develops a
simple model with complete markets
Meese, and Rogoff, (1983) “The out of sample failure of empirical exchange rate models,” in: J.A.
Frenkel, ed., Exchange rates and international macroeconomics (University of Chicago Press,
Chicago), chapter 3
*Meese, and Rogoff, (1983) “Empirical Exchange Rate Models of the Seventies: Do They Fit Out
of Sample?” Journal of International Economics 14, 3-24.
*Mark, N., (1995) “Exchange rates and Fundamentals: evidence on long-horizon predictability,”
American Economic Review, March, 201-218
Mark, N. C., and Sul, D. (2001) “Nominal Exchange Rates and Monetary Fundamentals: Evidence
from a Small Post-Bretton Woods Panel,” Journal of International Economics 53, 29-52.
+Engel, C. and K. West (2005) “Exchange Rates and Fundamentals,” Journal of Political
Economy 113, 485-517.
+Mark, N. C. (2005) “Changing Monetary Policy Rules, Learning, and Real Exchange Rate
Dynamics,” NBER Working Paper 11061.
2. International Business cycles and Exchange Rates
Baxter, Marianne, 1996, International Trade and Business Cycles, HB Chapter 35. also in
National Bureau of Economic Research Working Paper: 5025.
*Backus, David K; Kehoe, Patrick J; Kydland, Finn E., 1992, “International Business Cycles:
Theory and Evidence,” Journal of Political Economy 100, 745-75. Also in Cooley, Frontiers of
Business Cycle Research. Two-country RBC model explains investment and CA dynamics…
+Baxter, M. and M. Crucini (1993) “Explaining Savings-Investment Correlations,” American
Economic Review 83, 416-36.
An application of the RBC approach to the Feldstein-Horioka puzzle.
*Mendoza, E., “Real Business Cycles in a Small Open Economy: The Canadian Case,” AER 1991.
+Stockman, Alan C. and Tesar, Linda L., 1995, Tastes and Technology in a Two-Country Model
of the Business Cycle: Explaining International Comovements, American Economic Review. Vol.
85 (1). p 168-85. March … but can standard RBC models explain consumption behavior?…
3. Forward Premium Puzzle
Karen Lewis, Puzzles in International Finance, HB 1913-1949.
*Engel, C. (1996) “The Forward Discount Anomaly and the Risk Premium: A Survey of Recent
Evidence,” Journal of Empirical Finance 3, 123-192.
Backus, David K; Gregory, Allan W; Telmer, Chris I., 1993, Accounting for Forward Rates in
Markets for Foreign Currency,. Journal of Finance. Vol. 48 (5). p 1887-1908. December
*Dave Backus, Silverio Foresi Telmer Chris, 2001, “Affine Term Structure Models and the
Forward Premium Anomaly,” Journal of Finance 56, 279-304.
Fama, Eugene, (1984) Forward and Spot Exchange Rates, Journal of Monetary Economics, 14,
319-338.
Bansal, R. (1997) “An Exploration of the Forward Premium Puzzle in Currency Markets,” Review
of Financial Studies 10, 369-403.
Bansal, R., and M. Dahlquist (2000) “The Forward Premium Puzzle: Different Tales from
Developed and Emerging Economies,” Journal of International Economics 51, 115-144.
*Alvarez, Fernando, Andy Atkeson and Pat Kehoe, 2002, “Money, Interest Rates, and Exchange
Rates with Endogenously Segmented Markets,” Journal of Political Economy 110, 93-112.
*Bacchetta, P. and E. Wincoop (2005) “Rational Inattention: Solution to the Forward Discount
Puzzle,” NBER 1163.
+Frankel & Poonawala (2006) "Forward Market in Emerging Currencies: Less Biased then in
Major Currencies" NBER Working paper 12496
+Burnside, Eichenbaum, Kleschchelski and Rebelo (2006) "The Returns to Currency Speculation"
NBER Working paper 12489.
4. Purchasing Power parity deviations: goods markets imperfections.
+*Rogoff, K., 1996, “The Purchasing-Power Parity Puzzle,” Journal of Economic Literature, 34,
647-668.
+Engel, C., 1999, “Accounting for US real Exchange Rate Changes,” Journal of Political
Economy, 107, 507-538.
5. Empirical asset pricing
*Harvey, C., 1991, “The World Price of Covariance Risk,” The Journal of Finance, 111-158.
*Dumas, B. and B. Solnik, 1995, "The World Price of Foreign Exchange Risk," The Journal of
Finance, 50, 445-479.
Ferson, W. and C. Harvey, 1993, “The Risk and Predictability of International Equity Returns,”
Review of Financial Studies, 527-566.
De Santis, G. and B. Gérard, 1997, “International Asset Pricing and Portfolio Diversification with
Time-varying Risk,” Journal of Finance, 52, 1881-1912.
5. Segmentation/ Limited Participation / Home country bias
5.1. Home bias puzzle
Tesar, I. And I. M. Werner, 1995, “Home Bias and High Turnover,” Journal of International
Money and Finance.
*Lewis, K., 1999, "Trying to Explain Home Bias in Equities and Consumption," Journal of
Economic Literature, XXXVII, 571-608.
5.2. International Consumption Puzzle
+Lewis, K., 1996, "What Can Explain the Apparent Lack of International Consumption RiskSharing?" Journal of Political Economy, 104, 267-297.
5.3. International Risk Sharing
*Obstfeld, M., 1994, "Risk Taking, Global Diversification and Growth," American Economic
Review, 84, 1310-1329.
+Lewis, K. "Why do stocks and consumption imply such different gains from international
risksharing," Journal of International Economics 52, 2000, pp. 1-35.
Devereux, M. and G. Smith, “International Risksharing and Economic Growth,” IER
Stulz, R., 1999, “Globalization of Equity Markets and the Cost of Capital,” working paper, Ohio
State University.
6. Alternative Approach
6.1. Sticky price models
*Chari, V V, Kehoe, Patrick J, McGrattan, Ellen R., 2002, Can Sticky Price Models Generate
Volatile and Persistent Real Exchange Rates, The Review of Economic Studies
*Betts, Caroline; Devereux, Michael B., 1996, “The Exchange Rate in a Model of
Pricing-to-Market,” European Economic Review Vol. 40 (3-5). p 1007-21. April
6.2. New Open Macro Model
*Obstfeld and Rogoff, “Exchange Rate Dynamics Redux, JPE 1995.
+Obstfeld and Rogoff, “The six major puzzles in international macroeconomics: Is there a
common cause?” NBER Working Paper 7777, 2000.
+Debreux, M., and C. Engel (2002) “Exchange Rate Pass Through, Exchange Rate Volatility, and
Exchange Rate Disconnect,” Journal of Monetary Economics 49, 913-40.
6.3. Information and Exchange Rate
Bacchetta, P. and E. Wincoop (2004) “Scapegoat Model of Exchange Rate Fluctuations,”
American Economic Review 94, 114-8.
Bacchetta, P. and E. Wincoop (2005) “Can Information Heterogeneity Explain the Exchange
Determination Puzzle?” American Economic Review, forthcoming
7. Exchange Rate Regimes
*Frankel, J. (2003) “Experience of and Lessons from Exchange Rate Regimes in Emerging
Economies,” NBER Working paper 10032.
Levy-Yetani and Strurzennegger (2003)
+Dubas, Lee and Mark (2005)
8. Crises/Contagion
Morris, S. and H. S. Shin, 1998, “Unique Equilibrium in a Model of Self-Fulfilling Currency
Attacks,” American Economic Review, 88, 587-597.
+Allen, F. and D. Gale, 2000, "Financial Contagion," Journal of Political Economy, 108, 1-33.
+Bae, Karolyi, and Stulz (2003) "A New Approach to Measuring Financial Contagion," Review of
Financial Studies 16, 717-63.
9. Global Imbalances
+Prasad, E. S., K. Rogoff, S-J. Wei, and M. A. Kose (2003) Effects of Financial Globalization on
Developing Countries: Some Empirical Evidence, International Monetary Fund Occasional Paper
220.
IMF (2005) World Economic Outlook: Globalization and External Balances.
Bernanke, B., 2005, “The Global Saving Glut and the U.S. Current Account Deficit,” Sandridge
Lecture, Virginia Association of Economics, Richmond, Virginia, Federal Reserve Board.
Dooley, M., D. Folkerts-Landeau, and P. Garber, 2003, “An Essay on the Revised Bretton Woods
System,” NBER Working Paper 9971.
+Obstfeld, M., and K. Rogoff, 2005, “Global Current Account Imbalances and Exchange Rate
Adjustments,” Brookings Papers on Economic Activity 1, 67-146.
Ricardo J. Caballero, Emmanuel Farhi and Pierre-Olivier Gourinchas, 2006,
“An Equilibrium Model of "Global Imbalances" and Low Interest Rates”