IRGN 403: International Economics
Thomas Baranga
IR/PS

Spring 2015

1

International Linkages Between Economies
First 5 Weeks: Macroeconomic Linkages - Financial Flows
Determination of the exchange rate
Effects of the international on the domestic macroeconomy
The choice of exchange rate regime

Second 5 Weeks: Microeconomic Linkages - Physical Trade
Trade in Goods
Migration
Foreign Direct Investment
Trade Policy

Course Logistics
Textbook
International Economics, Feenstra and Taylor (3rd ed, 2014)
Ch 12 : Overview
Ch 13-15 : Exchange Rates
Ch 16-17 : International Financial Flows
Ch 18 : A Keynesian Macroeconomic Model
Ch 19-20 : Exchange Rate Policy

Assignments
24% 4 Problem Sets
35% Midterm Exam
35% Final Exam
6% Class Participation

Overview: Open-Economy Macroeconomics
Exchange Rate Determination
Short-run: financial equilibrium
Long-run: monetary equilibrium

Balance of Payments
National Income Accounting
International Borrowing and Debt
Interaction with domestic economy: IS-LM model

Government Policy
Monetary Policy
Fiscal Policy
Exchange Rate Policy

Central Role of Exchange Rates
Most Countries use their own National Currency
There are 192 member states in the United Nations
About 160 different currencies are in use
Most countries have their own currency
Some share a common currency: eg Euro, West African Franc
Some adopt another country’s currency: Ecuador uses US$

Exchange rate features in international transactions
If buyer and seller use different currencies, one side must transact in foreign currency
Price in domestic currency will depend on exchange rate
Exchange rates feature in most international transactions
5

What Determines the Exchange Rate?
Demand for foreign currency: financial assets
Arbitrage between domestic and foreign assets
Comparison of rates of return in different currencies

Demand for foreign currency: trade in goods
Goods market arbitrage: buy more foreign goods (and currency) when cheaper

Government Policy
Exchange rate regime
Capital controls

6

Source: Federal Reserve

7
2014‐11‐08

2013‐11‐08

2012‐11‐08

2011‐11‐08

2010‐11‐08

2009‐11‐08

2008‐11‐08

2007‐11‐08

2006‐11‐08

2005‐11‐08

2004‐11‐08

2003‐11‐08

2002‐11‐08

2001‐11‐08

2000‐11‐08

1999‐11‐08

1998‐11‐08

1997‐11‐08

1996‐11‐08

1995‐11‐08

1994‐11‐08

1993‐11‐08

Mexican pesos/US$

Mexican peso/US$ Exchange Rate, 1993-2015
18

16

14

12

10

8

6

4

2

0

Source: Federal Reserve

8
2014‐11‐08

2013‐11‐08

2012‐11‐08

2011‐11‐08

2010‐11‐08

2009‐11‐08

2008‐11‐08

2007‐11‐08

2006‐11‐08

2005‐11‐08

2004‐11‐08

2003‐11‐08

2002‐11‐08

2001‐11‐08

2000‐11‐08

1999‐11‐08

1998‐11‐08

1997‐11‐08

1996‐11‐08

1995‐11‐08

1994‐11‐08

1993‐11‐08

log Mexican peso/US$

Log Mexican peso/US$ Exchange Rate, 1993-2015
100

10

1

1‐Jan‐1950

Source: Federal Reserve

9
1‐Apr‐2013

1‐Jul‐2010

1‐Oct‐2007

1‐Jan‐2005

1‐Apr‐2002

1‐Jul‐1999

1‐Oct‐1996

1‐Jan‐1994

1‐Apr‐1991

1‐Jul‐1988

1‐Oct‐1985

1‐Jan‐1983

1‐Apr‐1980

1‐Jul‐1977

1‐Oct‐1974

1‐Jan‐1972

1‐Apr‐1969

1‐Jul‐1966

1‐Oct‐1963

1‐Jan‐1961

1‐Apr‐1958

1‐Jul‐1955

1‐Oct‐1952

Japanese ¥/US$

Japanese
/US$ Exchange Rate, 1950-2015

400

350

300

250

200

150

100

50

0

1‐Jan‐1950
1‐Oct‐1952
1‐Jul‐1955
1‐Apr‐1958
1‐Jan‐1961
1‐Oct‐1963
1‐Jul‐1966
1‐Apr‐1969
1‐Jan‐1972
1‐Oct‐1974
1‐Jul‐1977
1‐Apr‐1980
1‐Jan‐1983
1‐Oct‐1985
1‐Jul‐1988
1‐Apr‐1991
1‐Jan‐1994
1‐Oct‐1996
1‐Jul‐1999
1‐Apr‐2002
1‐Jan‐2005
1‐Oct‐2007
1‐Jul‐2010
1‐Apr‐2013

Japanese ¥/US$ (log scale)

Log Japanese
/US$ Exchange Rate, 1950-2015

1000

100

10

1

Source: Federal Reserve

10

Chinese RMB/US$ Exchange Rate, 1981-2015
10
9
8

RMB/US$

7
6
5
4
3
2
1
0

Source: Federal Reserve

11

Source: Federal Reserve

12
2015‐01‐02

2014‐01‐02

2013‐01‐02

2012‐01‐02

2011‐01‐02

2010‐01‐02

2009‐01‐02

2008‐01‐02

2007‐01‐02

2006‐01‐02

2005‐01‐02

2004‐01‐02

2003‐01‐02

2002‐01‐02

2001‐01‐02

2000‐01‐02

1999‐01‐02

1998‐01‐02

1997‐01‐02

1996‐01‐02

1995‐01‐02

Brazilian real/US$