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Home , Kenneth Rogoff

Revised September 13, 2016

Department of ,

Economics 1545: International Financial and Macroeconomic Policy

Professor Kenneth Rogoff

Time and Place: Fall 2016; M, W, 1-2:30 pm.; Harvard Hall 103

Office Hours: Littauer Center 216. Mondays 4-5 PM, or by appointment

Email: [email protected] (N.B. When sending an email pertaining to this course, please put "1545" in the subject header.)

Teaching Assistant: Nihar Shah, [email protected]

Discussion Sections: T.B.A. (both sections will cover identical material).

Staff Assistant: Jane Trahan, [email protected], 496-0062

Overview:

This is an advanced international finance and macroeconomics course that uses a mix of theoretical, empirical and policy frameworks to analyze topical problems in international finance.

Prerequisites: Economics 1011b (preferably) or 1010b (Knowledge of basic calculus will be assumed.)

Background Texts: (On reserve at Lamont Library, and available for purchase at the COOP.)

● Foundations of International Macroeconomics, by and Kenneth Rogoff, MIT Press, 1996.

● This Time Is Different: Eight Centuries of Financial Folly, by and Kenneth Rogoff, Press, 2009, (selected chapters).

● The Curse of Cash, by Kenneth Rogoff, Princeton University Press, 2016 (selected chapters)

Readings: Readings can be accessed online or are available on Reserve at Lamont Library. Primary readings are denoted by an * symbol. Supplementary readings will be summarized in class but are not required.

Problem Sets: Students are encouraged to work with others on the problem sets, and it is permissible to hand in a single answer sheet for up to three students, with all three receiving the same group grade.

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Course Requirements:

Midterm: Wednesday, October 19 (in-class, closed book; but exam will provide most of the basic formulas you might require, to lessen need for memorization). Analytical problems on the exam will closely parallel material covered in problem sets (but will generally require much less algebra), and the essay problem will relate to a central topic covered extensively in class.

Final: The final will have a larger essay component than the mid-term. It will draw on the entire course.

Short policy paper: You will be asked to write a short policy paper on a topic drawn from a list of questions relating to reform of the international monetary system. A one-page outline of your paper is due Monday morning, 9 am, October 31, and the complete paper is due at 9 am on Monday, November 14. The three policy discussions will be in class on November 21, November 28 and November 30. The papers are intended to be short and succinct—there is an absolute total page limit of 10 double-spaced (12 pt.) pages (roughly 2500 words): Only figures and references are excluded in this limit. The papers do not need to include any formal analytical or econometric analysis; you may write them in a style you find suitable to the question you are addressing. The final exam will include (a choice of) essay questions relating to the paper topics that you and your classmates have chosen.

Problems: There will be 3 problem sets, due September 19, October 3 and November 7 October 31

Grades: Problems: 10%, Mid-term: 20%, Final: 35%, Paper: 35%

TOPICS

I. THE LOW INTEREST RATE PUZZLE AND FINANCIAL REPRESSION

*Obstfeld-Rogoff (OR) 285-294 (consumption correlations puzzle, rationale for the representative agent assumption), OR 306-319 (the equity premium puzzle and the low interest rate puzzle), OR 329- 332 (how large are the gains from international risk sharing)

Barro, Robert J., "Rare Disasters and Asset Markets in the Twentieth Century," Quarterly Journal of Economics, August 2006: 823-866.

*Reinhart, Carmen M and M. Belen Sbrancia, "The Liquidation of Government Debt," NBER working paper 16893, March 2011. Economic Policy, 2015.

Giovannini, Alberto and Martha de Melo. 1993. "Government Revenue from Financial Repression." , vol. 83, No. 4: 953-963.

II. THE LOW INTEREST RATE PUZZLE AND SECULAR STAGNATION

*Gordon, Robert. 2015. “Secular Stagnation: A Supply-Side View.” American Economic Review 105 (May), 54-59

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*Summers, Lawrence, 2015. “Demand-Side Secular Stagnation,” American Economic Review 105 (May), 60-65.

*Rogoff, Kenneth 2016. “Debt Supercycle, Not Secular Stagnation,” in Progress and Confusion: The State of Macroeconomic Policy, , , Kenneth Rogoff and (editors), MIT Press, pp. 19–28.

Lo, Stephanie, and Kenneth Rogoff. 2015. “Secular Stagnation, Debt Overhang and Other Rationales for Sluggish Growth, Six Years On”. BIS Working Paper 482.

Summers, Lawrence, 2016. “Rethinking Secular Stagnation,” in Progress and Confusion: The State of Macroeconomic Policy, Olivier Blanchard, Raghuram Rajan, Kenneth Rogoff and Lawrence Summers (editors), MIT Press.

Gordon, Robert J. 2016. The Rise and Fall of American Growth. Princeton, NJ: Princeton University Press

III. BANK RUNS AND THE PERSISTENCE OF THE GREAT DEPRESSION

*Diamond, Douglas and Philip H. Dybvig, "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy 91(3): 401-19, June 1983.

Diamond, Douglas, "Banks and Liquidity Creation: A Simple Exposition of the Diamond Dybvig Model," Bank of Minneapolis Quarterly, 93(2).

*Bernanke, Ben, "Nonmonetary Effects of the in the Propagation of the Great Depression," American Economic Review 73 (June 1983): 257-76.

Cole, Harold and Lee Ohanian, "New Deal Policies and the Persistence of the Great Depression," Journal of Political Economy, 112(4) August, 2004, 779-816.

Shlaes, Amity, The Forgotten Man: A New History of the Great Depression, New York: Harper Books, 2007.

Also: International transmission of the Great Depression via flaws in the inter-war gold standard

*Obstfeld and Rogoff: pp. 626-630.

*Eichengreen, Barry and Jeffrey Sachs, "Exchange Rates and Economic Recovery in the 1930s," Journal of , vol. XLV, no. 4, December 1985, also NBER working paper 1498, May 1986.

IV. WHY MONEY FLOWS FROM NORTH TO SOUTH

*Moral Hazard: Obstfeld and Rogoff: pp. 407- 419.

Lucas, Robert E., "Why Doesn't Capital Flow from Rich to Poor Countries," American Economic Review, May 1990, pp. 92-96.

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Alfaro, Laura, Sebnem Kalemli-Ozcan, Vadym Volosovych, "Why Doesn't Capital Flow from Rich to Poor Countries: An empirical investigation," The Review of Economics and Statistics 90, no. 2 (May 2008): 347-368.

V. SOVEREIGN RISK AND DEFAULT

*Obstfeld and Rogoff, chapter 6, 363-401.

*Hebert, Benjamin and Jesse Schreger, "The Costs of Sovereign Default: Evidence from Argentina," mimeo, Harvard University, 2015, forthcoming American Economic Review 2016.

Bulow, Jeremy and Kenneth Rogoff, "Sovereign Debt: Is to Forgive to Forget?" American Economic Review 79 (March 1989), 43-50.

Bulow, Jeremy, and Kenneth Rogoff. 1988. “The Buyback Boondoggle.” Brookings Papers on Economic Activity 2: 675–698.

Aguiar, Mark and Manuel Amador, “Sovereign Debt,” in , Elhanan Helpman and Kenneth Rogoff, Handbook of Vol. 4, Elsevier (Amsterdam, 2014), 647-687.

VI. THE LOW INTEREST RATE PUZZLE AND GLOBAL IMBALANCES

*Rajan, Raghuram G., Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton University Press 2010.

*Obstfeld and Rogoff: pp. 1-84.

Mendoza, Enrique G., Vincenzo Quadrini, and Jose-Victor Rios-Rull, “Financial Integration, Financial Development, and Global Imbalances,” Journal of Political Economy 117 (3) (June 2009), 371- 416.

Gourinchas, Pierre-Olivier and Helene Rey, "External Adjustment, Global Imbalances, Valuation Effects," in Handbook of International Economics, vol. IV. Gita Gopinath, Elhanan Helpman and Kenneth Rogoff (eds.), Elsevier, Amsterdam, 2014, 585-645.

VII. SPECULATIVE EXCHANGE RATE ATTACKS

Basic models and empirical issues: Salant-Henderson-Krugman model, multiple equilibria ("generation 2")

*Obstfeld and Rogoff: pp. 558-567, 635-638, 648-653.

Morris, Stephen and Hyun Song Shin, "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review 88 (June 1998), 587-97.

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Atkeson, Andrew, “Comment on Morris and Shin” in NBER Macroeconomics Annual 2000 ( and Kenneth Rogoff, eds.), MIT Press, 2001, p. 162-171.

Ivan Pastine, "Speculation and the Decision to Abandon a Fixed Exchange Rate Regime," Journal of International Economics 57(1), June 2002, 197-229.

Amador, Manuel, Javier Bianchi, Luigi Bocola, and Fabrizio Perri, "Reverse Speculative Attacks," Federal Reserve Bank of Minneapolis, Staff Report 528, May 2016.

VIII. PERFORMANCE OF EXCHANGE RATE REGIMES

*Rose, Andrew, "One Money, One Market: Estimating the Effects of a Common Currency on Trade," Economic Policy 15(30), April 2000, 7-45.

*Husain, Aasim, Ashoka Mody, and Kenneth Rogoff, "Exchange Rate Regime Durability and Performance in Developing versus Advanced Economies," Journal of 52 (January 2005), 35-64.

Reinhart, Carmen and Kenneth Rogoff, "The Modern History of Exchange Rate Arrangements: A Reinterpretation," Quarterly Journal of Economics 119(1): 1-48, February 2004.

Glick, Reuven and Andrew Rose, 2016. “Currency Unions and Trade: A Post-EMU Reassessment." The line: EMU leads exports to rise by 50% even with 55,000 fixed effects. Forthcoming, European Economic Review. Early versions available as CEPR DP 10,615. NBER WP 21535. Current version.

IX. ZERO BOUND ON INTEREST RATES (PART 1)

*Krugman, Paul, "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Macroeconomic Activity, 1998, v2, 137-205 (including comment by Dominguez and Rogoff) (N.B.: Our focus will be on the analytics as covered in the HANDOUT).

Eggertsson, Gauti and , "Debt, Deleveraging and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics (2012), 1469-1513. doi:10.1093/qje/qjs023.

Eggertsson, Gauti B. and Michael Woodford, "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity 34 (2003), volume 1, 139-235.

X. ZERO BOUND ON INTEREST RATES (PART 2), DEALING WITH THE ZERO BOUND

*Rogoff, Kenneth. The Curse of Cash. Princeton University Press, 2016. Parts II and III.

Agarwal, Ruchir, and Miles Kimball. 2015. “Breaking Through the Zero Lower Bound.” International Monetary Fund Working Paper WP 15/224, October.

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Ball, Lawrence. 2014. “The Case for a Long-Run Inflation Target of Four Percent.” International Monetary Fund Working Paper WP 14/19 (June). Washington, DC: International Monetary Fund. (For a short summary, see “The Case for 4% Inflation.” VoxEU.org, May.)

Rogoff, Kenneth. “Foreign and Underground Demand for Euro Notes: Blessing or Curse?” Economic Policy 26, April 1998, 263-303.

Rogoff, Kenneth S. “Costs and Benefits to Phasing Out Paper Currency,” In NBER Macroeconomics Annual 2014, Vol. 29: 445-456. Also NBER Working Paper No. 20126, May 2014.

Woodford, Michael. 2012. “Methods of Monetary Accommodation at the Zero Bound.” In Proceedings of the Federal Reserve Bank of Kansas City Symposium on Economic Policy, Jackson Hole, WY, August 30–September 1.

XI. GLOBAL INTEGRATION: DEVELOPING COUNTRIES

*Kose, M. Ayhan, Eswar Prasad, Kenneth Rogoff and Shang-Jin Wei, "Financial Globalization, A Reappraisal," IMF Staff Papers 56(1), 2009.

Jeanne, Olivier, Arvind Subramanian and John Williamson, Who Needs to Open the Capital Account, Washington: The Peterson Institute for International Economics, 2011.

XII. GLOBAL CAPITAL MARKET INTEGRATION: ADVANCED COUNTRIES

*Obstfeld, Maurice and Kenneth Rogoff, "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?" in Ben Bernanke and Kenneth Rogoff (eds.), NBER Macroeconomics Annual 2000 (Cambridge: MIT Press), pp. 339-390 (Comments 390-412).

Eaton, Jonathan, Kortum, Samuel and Brent Neiman, 2016. Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment," mimeo, University of Chicago. May.

*Obstfeld and Rogoff: pp. 161-164.

XIII. THE SPECIAL ROLE OF THE DOLLAR

*Rey, Helene, “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence,” Proceedings of Kansas City Federal Reserve (Jackson Hole) Symposium, 2013. (more recent version, NBER working paper 21162, May 2015)

*Gopinath, Gita, “The International Price System,” Proceedings of Kansas City Federal Reserve (Jackson Hole) Symposium, 2015.

Eichengreen, Barry, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, London: Oxford University Press 2011.

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Ilzetski, Ethan, Carmen Reinhart and Kenneth Rogoff, “Modern History of Exchange Rates Revisited,” mimeo, Harvard University, Fall 2016 (anticipated).

XIV: GLOBAL FINANCIAL CRISIS, PART I

*Reinhart, Carmen and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press, 2009, chapters 13-17.

Reinhart, Carmen and Kenneth Rogoff, 2014. “Recovery from Financial Crises: Evidence from 100 Episodes.” American Economic Review: Papers and Proceedings 104 (5): 50-55.

Schularick, Moritz and Alan Taylor, "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review 102 (2), April 2012, 1029-61.

XV: GLOBAL FINANCIAL CRISIS, PART II

* Reinhart, Carmen M, and Kenneth S Rogoff. 2014. “Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten,” in Financial Crises: Causes, Consequences, and Policy Responses, edited by S. Claessens, M.A. Kose, L. Laeven, and F. Valencia. Reinhart, Carmen and Kenneth Rogoff, "From Financial Crash to Debt Crisis," American Economic Review, August 2011. DATA. Also available as NBER working paper 15795, March 2010.

Geanakoplos, John, "The Leverage Cycle," in NBER Macroeconomics Annual 2009, Daron Acemoglu, Kenneth Rogoff, and Michael Woodford (eds), University of Chicago Press, 2010.

Geanakoplos, John, “Leverage, Default and Forgiveness: Lessons from American and European Crises,” Journal of Macroeconomics 39 (2014): 313-333.

Gorton, Gary, "Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007," Federal Reserve Bank of Atlanta, Financial Markets Conference, May 2009.

XVI: DEBT OVERHANG

*Reinhart, Carmen M, Vincent Reinhart, and Kenneth Rogoff. 2015. “Dealing with Debt,” Journal of International Economics 96, Supplement 1 (July), S43-S55.

*Mian, Atif and Amir Sufi, House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis (with Atif Mian), American Economic Review, August 2011, 101: 2132-2156.

Lucas, Deborah, “Credit Policy as Fiscal Policy,” Brookings Papers on Economic Activity Spring 2016. http://www.brookings.edu/about/projects/bpea/past-editions

Woo, Jaejoon and Manmohan Kumar (2015), "Public Debt and Growth," Economica 82 (328): 705-739 (October).

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Reinhart, Carmen M., Vincent R. Reinhart and Kenneth S. Rogoff, "Public Debt Overhangs: Advanced- Economy Episodes since 1800," Journal of Economic Perspectives 26 (3): 69-86, Summer 2012. Also NBER Working Paper 18015, April 2012.

XVII. THE PURCHASING POWER PARITY PUZZLE AND RELATED PUZZLES

*Kenneth Rogoff, "The Purchasing Power Parity Puzzle," Journal of Economic Literature 34, June 1996, 647-68.

*Obstfeld and Rogoff: pp. 199-225.

*Gopinath, Gita and Roberto Rigobon, "Sticky Borders," Quarterly Journal of Economics, May 2008, Volume 123(2): 531-575.

Burstein, Ariel and Gita Gopinath, "International Prices and Exchange Rates," Handbook of International Economics, Vol. IV, 2014, 391-451.

XVIII: SELECTED ISSUES IN INEQUALITY

Karabarbounis, Loukas and Brent Neiman, 2014. “The Global Decline of the Labor Share,” Quarterly Journal of Economics 129 (1): 61-103.

Deaton, Angus. 2013. The Great Escape: Health, Wealth and the Origins of Inequality. Princeton, NJ: Princeton University Press.

Rognlie, Matthew, 2015. “Deciphering the Fall and the Rise in the Net Capital Share.” Brookings Papers on Economic Activity, Spring.

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