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Home , Kenneth Rogoff

Department Econ 2530b: International Finance, Spring 2015 Professor Logistics: My office: Littauer Center 206 Email: [email protected] Class Time and Place: Monday and Wednesday 8:30-10:00 a.m., Littauer M-17 Office hours: Monday 3:30-4:30 p.m. Teaching Fellow: Argyris Tsiaras, [email protected]

Note: This is an advanced graduate level course in international macroeconomics designed for students in a Ph.D. program. There is no required text book for the course but several lectures will use chapters from the Handbook of , Vol. 4, co-edited by Gopinath, Helpman, and Rogoff, henceforth GHR. Individual copies of the chapters can be downloaded from the class website or found at the link for the textbook below.

Handbook of International Economics,Volume 4. Edited by Gita Gopinath, Elhanan Helpman, Kenneth Rogoff, 1-740. Amsterdam: Elsevier, 2015.

Course Requirements: There will be four problem sets and one class report. Problem sets: The problem sets will involve the use of computational software such as Matlab or any other program with which you are comfortable. You can work in groups of two at most on the problem sets. See the detailed problem set instructions on the course website. Report: Class participants will be asked to work through one paper. You can choose a paper from the list of readings below, or you can choose an unlisted reading from a leading journal. In either case, you will need to get it approved by me. I will be happy to discuss with each of you the topic in which you are interested and suggestions for a paper. The deadline for deciding on the paper is Monday, March 23th. You will be asked to critically review the paper and this may involve extending the model, recalibrating a simulation or checking on core empirical results. The idea is to start thinking about a research paper. You will be asked to give a presentation of your analysis in class and write up a brief report on any new ideas arising from this review. That is, the report will only describe new ideas and directions for research that arise from your review, not the details of the papers. It can be as short as 3-4 pages. Presentations will be scheduled during the weeks of Monday, April 13th and Monday, April 20st. The written report will be due on the last day of class, Wednesday, April 29th. You can consult your classmates while preparing your report, but the final write-up of the report and presentation should be done independently.

Breakfast meetings: Every three weeks (or so) there will be a breakfast meeting (with food) from 8:30-9:30 a.m. in M-17 to discuss research ideas in international macro. I may assign a thought piece related to the material covered in the previous 3 weeks that can form the basis for a discussion. The first one is scheduled for Feb 13. Attendance is optional.

Final Grade: Class discussion: 10%; Problem Sets: 60%; Report: 30%

Readings

Entries that list a Digital Object Identifier (DOI) may be located online by using the following format. If the DOI is: 10.1086/511283, then the URL will be: http://dx.doi.org/10.1086/511283 http://dx.doi.org

Topic 1: International Prices and Exchange Rates Main Readings:

1. Alessandria, George, Joseph P. Kaboski, and Virgiliu Midrigan. 2010. “Inventories, Lumpy Trade, and Large Devaluations.” 100(5): 2304–39. doi:10.1257/aer.100.5.2304

2. Atkeson, Andrew, and Ariel Burstein. “Pricing-to-Market, Trade Costs, and International Relative Prices.” American Economic Review 98(5) (2008): 1998-2031. doi:10.1257/aer.98.5.1998

3. Burstein, Ariel, Martin Eichenbaum, and Sergio Rebelo. “Large Devaluations and the Real Exchange Rate.” Journal of Political Economy 113(4) (August 2005): 742-784. doi:10.1086/431254

4. Burstein, Ariel and Gita Gopinath. “International Prices and Exchange Rates.” In Handbook of International Economics,Volume 4, edited by Gita Gopinath, Elhanan Helpman, Kenneth Rogoff, 391-451. Amsterdam: Elsevier, 2015. doi:10.1016/B978-0-444-54314-1.00007-0

5. Berman, Nicolas, Philippe Martin, Thierry Mayer. “How do different exporters react to exchange rate changes?” The Quarterly Journal of Economics (2012) 127 (1): 437-492. doi:10.1093/qje/qjr057

6. Gopinath, Gita, Oleg Itskhoki, and Roberto Rigobon. “Currency Choice and Exchange Rate Pass-through.” American Economic Review 100(1) (2010): 304–36. doi:10.1257/aer.100.1.304

Additional Readings:

1. Cavallo, Alberto, Brent Neiman, and Roberto Rigobon. “Currency Unions, Product Introductions, and the Real Exchange Rate.” Quarterly Journal of Economics (forthcoming).

2. Engel, Charles. “Accounting for U.S. Real Exchange Rate Changes.” Journal of Political Economy 107(3) (June 1999): 507-538. doi:10.1086/250070

3. Gopinath, Gita, Pierre-Olivier Gourinchas, Chang-Tai Hsieh, and Nicholas Li. “International Prices, Costs and Mark-up Differences.” American Economic Review 101(6)(2011): 2450–86. doi:10.1257/aer.101.6.2450 Abstract PDF

4. Gopinath, Gita, and Oleg Itskhoki. “Frequency of Price Adjustment and Pass-through.” Quarterly Journal of Economics 125(2) (2010): 675-727. doi:10.1162/qjec.2010.125.2.675

5. Gopinath, Gita, and Roberto Rigobon. “Sticky Borders.” Quarterly Journal of Economics 123(2) (2008): 531-575. doi:10.1162/qjec.2008.123.2.531

6. Gorodnichenko, Yuriy, and Linda L. Tesar. “Border Effect or Country Effect? Seattle May Not Be So Far from Vancouver After All.” American Economic Journal: Macroeconomics 1(1) (2009): 219-41. doi:10.1257/mac.1.1.219

7. Guerrieri, Luca, Christopher Gust, and J. David López-Salido. 2010. “International Competition and Inflation: A New Keynesian Perspective.” American Economic Journal: Macroeconomics, 2(4): 247-80. doi: 10.1257/mac.2.4.247

Topic 2: Exchange Rate Determination, Open Economy Sticky Price Models Main Readings:

1. Backus, David K. and Gregor W. Smith. “Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods.” Journal of International Economics 35(3-4) (November 1993): 297-316. doi:10.1016/0022-1996(93)90021-O

2. Carvalho, C. and F. Nechio, “Aggregation and the PPP puzzle in a Sticky Price Model.” American Economic Review 101(6) (October 2011): 2391-2424. doi:10.1257/aer.101.6.2391

3. Chari, V.V., Patrick J. Kehoe, and Ellen R. McGrattan. “Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?” Review of Economic Studies 69(3) (July 2002): 533-563.

4. Engel, Charles. “Exchange Rates and Interest Parity.” In Handbook of International Economics,Volume 4, edited by Gita Gopinath, Elhanan Helpman, Kenneth Rogoff, 453-522. Amsterdam: Elsevier, 2015. doi:10.1016/B978-0-444-54314-1.00008-2

5. Gabaix, Xavier, and Maggiori, Matteo. “International Liquidity and Exchange Rate Dynamics.” NBER Working Paper No. 19854. January 2014. doi:10.3386/w19854

Additional Readings

1. Bacchetta, Philippe and Eric van Wincoop. “Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?” American Economic Review 96(3) (June 2006): 552- 576.

2. Engel, Charles, Nelson C. Mark, and Kenneth West. “Exchange Rate Models Are Not As Bad As You Think,” in NBER Macroeconomics Annual 2007, Vol. 22., edited by Daron Acemoglu, Kenneth Rogoff and Michael Woodford, 381-441. Chicago: University of Chicago Press, 2008.

3. Engel, Charles, and Kenneth D. West. “Exchange Rates and Fundamentals.” Journal of Political Economy 113(3) (June 2005): 485-517. doi:10.1086/429137

4. Gourinchas, Pierre-Olivier, and Hélène Rey. “International Financial Adjustment.” Journal of Political Economy 115(4) (August 2007): 665-703. doi:10.1086/521966

5. Rogoff, K. “Comment on ‘Exchange Rate Models are Not as Bad As You Think’,” in NBER Macroeconomics Annual 2007,Vol. 22., edited by Daron Acemoglu, Kenneth Rogoff and Michael Woodford, 443-452. Chicago: University of Chicago Press, 2008.

Topic 3: Open Economy Monetary Policy Main Readings:

1. Corsetti, Giancarlo, Luca Dedola, and Sylvain Leduc. “Optimal monetary policy in open economies.” Published in the Handbook of , Vol. 3, Edited by Ben Friedman and Michael Woodford, 2010.

2. Engel, Charles. “Exchange Rate Stabilization and Welfare.” Annual Review of Economics, Vol. 6: 155-177 (August 2014). doi:10.1146/annurev-economics-080213-041417

3. Galí, Jordi, and Tommaso Monacelli. “Monetary Policy and Exchange Rate Volatility in a Small Open Economy.” Review of Economic Studies 72(3) (2005): 707-734.

Additional Readings:

1. Engel, Charles. “Currency Misalignments and Optimal Monetary Policy: A Re-examination.” American Economic Review 101(6): 2796–2822. doi:10.1257/aer.101.6.2796

2. Klein, Michael W., and Jay C. Shambaugh. “Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy.” NBER Working Paper No. 19461. September 2013. doi:10.3386/w19461. Also, April 2014 version.

3. Rey, Hélène (August 2013). “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence.” Jackson Hole Symposium Paper.

Topic 4: Currency Unions Main Readings:

1. Chari, V.V., and Patrick J. Kehoe. “On the Need for Fiscal Constraints in a Monetary Union.” Journal of Monetary Economics 54(8) (November 2007): 2399-2408. doi:10.1016/j.jmoneco.2007.06.032

2. Farhi, Emmanuel, Gita Gopinath, and Oleg Itskhoki. “Fiscal Devaluations.” Review of Economic Studies 81(2014):725–760. doi:10.1093/restud/rdt036

3. Farhi, Emmanuel, and Ivan Werning. “Fiscal Unions.” Harvard University. Working Paper. July 2014.

4. Galí, Jordi, and Tommaso Monacelli. “Optimal Monetary and Fiscal Policy in a Currency Union.” Journal of International Economics 76(1) (September 2008): 116-132. doi:10.1016/j.jinteco.2008.02.007

Additional Readings:

1. Alesina, Alberto, Robert Barro, and . “Optimal Currency Areas,” in NBER Macroeconomics Annual 2002 edited by and Kenneth Rogoff, 301-356. Cambridge, MA: MIT Press, 2002.

2. Chari, Varadarajan V., and Patrick J. Kehoe. “Time Inconsistency and Free-Riding in a Monetary Union.” Journal of Money, Credit, and Banking 40(7) (Oct., 2008): 1329-1355. doi:10.1111/j.1538-4616.2008.00162.x

3. Mendoza, Enrique G., Linda L. Tesar, and Jing Zhang. “Saving Europe?: The Unpleasant Arithmetic of Fiscal in Integrated Economies.” NBER Working Paper No. 20200. June 2014. doi:10.3386/w20200

4. Mundell, Robert A. “A Theory of Optimum Currency Areas.” American Economic Review 51(4) (Sept 1961): 657-665.

Topic 5: Current Account, Global Imbalances, and Valuation Effects Main Readings:

1. Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych. “Sovereigns, Upstream Capital Flows and Global Imbalances.” Journal of the European Economic Association 12, no. 5 (October 2014): 1240–1284. doi:10.1111/jeea.12106

2. Backus, David K., Patrick J. Kehoe and Finn E. Kydland. “International Real Business Cycles.” Journal of Political Economy 100(4) (August 1992): 745-775.

3. Bruno, Valentina, and Hyun Song Shin. “Cross-Border Banking and Global Liquidity.” Review of Economic Studies. Forthcoming. Advance Access published December 2014. doi:10.1093/restud/rdu042

4. Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas. “An Equilibrium Model of Global Imbalances and Low Interest Rates.” American Economic Review 98(1) (March 2008): 358-393.

5. Coeurdacier, Nicolas, and Hélène Rey. 2013. “Home Bias in Open Economy Financial Macroeconomics.” Journal of Economic Literature, 51(1): 63-115. doi:10.1257/jel.51.1.63

6. Cole, Harold L., and . “Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?” Journal of Monetary Economics 28(1) (August 1991): 3-24. doi:10.1016/0304-3932(91)90023-H

7. Gourinchas, Pierre-Olivier, and Hélène Rey. “External Adjustment, Global Imbalances, Valuation Effects.” In Handbook of International Economics,Volume 4, edited by Gita Gopinath, Elhanan Helpman, Kenneth Rogoff, 585-645. Amsterdam: Elsevier, 2015. doi:10.1016/B978-0-444-54314-1.00010-0

8. Mendoza, Enrique G., Vincenzo Quadrini and José-Víctor Ríos-Rull. “Financial Integration, Financial Development, and Global Imbalances.” Journal of Political Economy 117(3) (June 2009): 371-416. doi:10.1086/599706

Additional Readings:

1. Aguiar, Mark and Gita Gopinath. “Emerging Market Business Cycles: The Cycle is the Trend.” Journal of Political Economy 115(1) (February 2007): 69-102. doi:10.1086/511283

2. Antras, P., and R. Caballero “Trade and Capital Flows: A Financial Frictions Perspective.” Journal of Political Economy 117 (4) (August 2009): 701-744. doi:10.1086/605583

3. Buch, Claudia M., and Linda S. Goldberg. “International Banking and Liquidity Risk Transmission: Lessons from Across Countries.” NBER Working Paper No. 20286. July 2014. doi:10.3386/w20286

4. Curcuru, Stephanie E., Tomas Dvorak, and Francis E. Warnock. “Cross-Border Return Differentials.” Quarterly Journal of Economics 123(4) (2008): 1495-1530. doi:10.1162/qjec.2008.123.4.1495

5. Dooley, Michael P., David Folkerts-Landau, and Peter Garber. “Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery,” in G7 Current Account Imbalances: Sustainability and Adjustment, edited by Richard H. Clarida, 103-130. Chicago: University of Chicago Press, 2007.

6. Farhi, Emmanuel, Pierre-Olivier Gourinchas, and Hélène Rey, “Reforming the International Monetary System.” [PDF] London: Centre for Economic Policy Research, 2011.

7. Gourinchas, P.-O., and H. Rey. “From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege,” in G7 Current Account Imbalances: Sustainability and Adjustment, edited by Richard H. Clarida, 11-66. University of Chicago Press, 2007.

8. Keyu, Jin. “Industrial Structure and Capital Flows.” American Economic Review 102(5) (2012). doi:10.1257/aer.102.5.2111

Topic 6: Financial Crises, International Recessions Main Readings:

1. Maggiori, Matteo. “Financial Intermediation, International Risk Sharing, and Reserve Currencies.” Working Paper. March 2013.

2. Mendoza, Enrique G. “Sudden Stops, Financial Crises, and Leverage.” American Economic Review 100(5) (December 2010): 1941–66. doi:10.1257/aer.100.5.1941

3. Neumeyer, Pablo A., and Fabrizio Perri. “Business Cycles in Emerging Economies: The Role of Interest Rates.” Journal of Monetary Economics 52(2) (March 2005): 345-380. doi:10.1016/j.jmoneco.2004.04.011

4. Perri, Fabrizio, and Vincenzo Quadrini. “International Recessions.” Working Paper. March 2014.

Additional Readings:

1. Bacchetta, Philippe, and Eric van Wincoop. “The Great Recession: A Self-Fulfilling Global Panic.” NBER Working Paper No. 19062. May 2013. doi:10.3386/w19062

2. Fernández-Villaverde, Jesús, Pablo Guerrón-Quintana, Juan F. Rubio-Ramírez, and Martin Uribe. “Risk Matters: The Real Effects of Volatility Shocks.” American Economic Review 101(6): 2530–61. doi:10.1257/aer.101.6.2530

3. Fornaro, Luca. “International Debt Deleveraging.” CREI. Working Paper. July 2014.

Topic 7: Capital Controls Main Readings:

1. Bianchi, Javier (2011), “Overborrowing and Systemic Externalities in the Business Cycle“, American Economic Review, 101(7): 3400–3426. doi:10.1257/aer.101.7.3400

2. Farhi, Emmanuel and Ivan Werning. “Dilemma not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows.” Working Paper. October 2013.

3. Jeanne, Olivier. “Macroprudential Policies in a Global Perspective.” NBER Working Paper No. 19967. March 2014. doi:10.3386/w19967

4. Korinek, Anton. “The New Economics of Prudential Capital Controls: A Research Agenda.” IMF Economic Review 59(3) (August 2011): 523-561.

5. Korinek, Anton, and Enrique G. Mendoza. “From Sudden Stops to Fisherian Deflation: Quantitative Theory and Policy.” Annual Review of Economics 6: 299-332. (Volume publication date August 2014.) doi:10.1146/annurev-economics-080213-041005

Topic 8: Sovereign Debt, Debt Crises Main Readings:

1. Aguiar, Mark, and Manuel Amador. “Sovereign Debt.” In Handbook of International Economics,Volume 4, edited by Gita Gopinath, Elhanan Helpman, Kenneth Rogoff, 647-687. Amsterdam: Elsevier, 2015. doi:10.1016/B978-0-444-54314-1.00011-2

2. Aguiar, Mark, Manuel Amador, Emmanuel Farhi, and Gita Gopinath, “Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises.” Harvard University. Working Paper. June 2013.

3. Aguiar, Mark, Manuel Amador, Emmanuel Farhi, and Gita Gopinath, “Coordination and Crisis in Monetary Unions.” Harvard University. Working Paper. April 2014.

4. Aguiar, Mark, Manuel Amador, and Gita Gopinath. “Investment Cycles and Sovereign Debt Overhang.” Review of Economic Studies 76(1) (January 2009): 1–31. doi:10.1111/j.1467- 937X.2008.00523.x

5. Aguiar, Mark, and Gita Gopinath. “Defaultable Debt, Interest Rates and the Current Account.” Journal of International Economics 69(1) (June 2006): 64-83. doi:10.1016/j.jinteco.2005.05.005

6. Broner, Fernando, Alberto Martin, and Jaume Ventura. “Sovereign Risk and Secondary Markets.” American Economic Review 100(4): 1523–55. doi:10.1257/aer.100.4.1523

7. Bulow, Jeremy, and Kenneth Rogoff. “Sovereign Debt: Is to Forgive to Forget?“ American Economic Review 79(1) (March 1989): 43-50.

8. Calvo, Guillermo A. “Servicing the Public Debt: The Role of Expectations.” American Economic Review 78(4) (Sept 1988): 647-661.

9. Cole, Harold L., and Timothy J. Kehoe. “Self-Fulfilling Debt Crises.” Review of Economic Studies 67(1) (January 2000): 91-116.

10. Cruces, Juan J., and Christoph Trebesch. “Sovereign Defaults: The Price of Haircuts.” American Economic Journal: Macroeconomics, 5(3)(2013): 85-117. doi: 10.1257/mac.5.3.85

11. Eaton, Jonathan, and Mark Gersovitz. “Debt with Potential Repudiation.” The Review of Economic Studies 48(2) (1981): 289-309.

12. Reinhart, Carmen M., and Kenneth Rogoff. “From Financial Crash to Debt Crisis.” American Economic Review 101 (August 2011), 1676-1706. doi:10.1257/aer.101.5.1676

13. Tirole, Jean. “Country Solidarity, Private Sector Involvement and the Contagion of Sovereign Crises,” IDEI Working Paper, n. 761, June 2012, revised September 2012.

14. Tomz, Michael, and Mark Wright. “Empirical Research on Sovereign Debt and Default.” Annual Review of Economics (Vol. 5): 247–272. doi:10.1146/annurev-economics-061109- 080443

15. Yue, Vivian Z. “Sovereign Default and Debt Renegotiation.” Journal of International Economics 80(2) (March 2010): 176-187. doi:10.1016/j.jinteco.2009.11.004

Additional Readings:

1. Arellano, Cristina, and Ananth Ramanarayanan. “Default and the Maturity Structure in Sovereign Bonds.” Journal of Political Economy 120(2) (April 2012): 187-232. doi:10.1086/666589

2. Bolton, Patrick and Jeanne Olivier. “Sovereign Default Risk and Bank Fragility in Financially Integrated Economies.” IMF Economic Review 59 (2011):162–194. doi:10.1057/imfer.2011.5

3. Bulow, Jeremy, and Kenneth Rogoff. “A Constant Recontracting Model of Sovereign Debt.” Journal of Political Economy 97(1) (February 1989): 155-178.

4. Bulow, Jeremy, and Kenneth Rogoff. “Sovereign Debt Repurchases: No Cure for Overhang.” Quarterly Journal of Economics 106(4) (November 1991): 1219-1235.

5. Chatterjee, Satyajit, Dean Corbae, Makoto Nakajima, and José-Víctor Ríos-Rull. “A Quantitative Theory of Unsecured Consumer Credit with Risk of Default.” Econometrica 75(6) (November 2007): 1525-1589.

6. Cole, Harold L., and Timothy J. Kehoe. “A Self-Fulfilling Model of Mexico’s 1994-1995 Debt Crisis.” Journal of International Economics 41(3-4) (November 1996): 309-330. doi:10.1016/S0022-1996(96)01439-0

7. Conesa, Juan Carlos, and Timothy Kehoe. “Gambling for Redemption and Self-Fulfilling Debt Crises.” Bank of Minneapolis. Working Paper. June 2012.

8. Eaton, Jonathan, and Raquel Fernandez. Chapter 39: “Sovereign debt,” in Handbook of International Economics, Vol. 3, edited by Gene M. Grossman and Kenneth Rogoff, 2031- 2077. Elsevier, 1995. doi:10.1016/S1573-4404(05)80019-X.

9. Gennaioli, Nicola, Alberto Martin, and Stefano Rossi. “Sovereign Default, Domestic Banks and Financial Institutions.” The Journal of Finance 69(2) (April 2014): 819–866. doi:10.1111/jofi.12124

10. Jeanne, Olivier. “Debt Maturity and the International Financial Architecture.” American Economic Review 99(5) (Dec 2009): 2135-2148.

11. Jeske, Karsten. “Private International Debt with Risk of Repudiation.” Journal of Political Economy 114(3) (June 2006): 576-593. doi:10.1086/503755

12. Kletzer, Kenneth M., and Brian D. Wright. “Sovereign Debt as Intertemporal Barter.” American Economic Review, 90(3) (June 2000): 621-639.

13. Mendoza, Enrique, and Vivian Z. Yue. “A Solution to the Disconnect Between Country Risk and Business Cycle Theories.” NBER Working Paper No. 13861 (April 2010). Also, October 2010 [PDF].

14. Na, Seunghoon, Stephanie Schmitt-Grohé, Martin Uribe, and Vivian Z. Yue. “A Model of the Twin Ds: Optimal Default and Devaluation.” NBER Working Paper No. 20314. July 2014. doi:10.3386/w20314. Also, November 2014 [PDF].