Applied Econometrics for International Economics Course Syllabus

Instructor: Olga Popova, Ph.D. candidate, CERGE-EI, Prague E-mail: [email protected] Office hours: chair 212, Wed 17.00-18.30 or by appointment

Class time and classroom Lectures: Fri, 19.30-21.00, room 317 (the room is subject to change); Thu, 19.30-21.00, room 425; Seminars: Mon, 12.20-13.50, computer class

Language of Instruction: English

Prerequisites: Basic Econometrics, Applied Econometrics for Macroeconomics, International Economics

Course description: This course serves as the part in the Econometrics sequence and builds on the knowledge received in theoretical courses in International Economics. The aim of the course is to introduce the methodology used in applied empirical research within International Economics and review the current state of theory and empirical work. Lectures will be accompanied with practical exercise sessions to assure the understanding of theoretical concepts and provide guidance for using these concepts in applied research.

Grading: The grade for the course is based on midterm exam (35%), non-cumulative final exam (35%), and two homework assignments (30%). Final grades for the course are relative: a student’s grade is based on the comparison of his performance with the performance of other students.

Midterm and final are written closed book, closed notes exams. There will be no possibility to make up a midterm exam. Violation of academic honesty during exams (including the use of unauthorized materials, receiving and/or providing unauthorized help from/to other students) would result in a failing grade for the exam.

Homework assignments will contain empirical and theoretical parts. Students may work at home assignments alone or in a group of up to three people, but everyone has to hand in his own solution. Please write the names of the members of your group at the homework. The first homework is due to midterm exam, the second one is due to final exam. For the first homework late submissions are acceptable; however for each day of delay 10 points (of total 100 points for the homework) will be subtracted from your homework score. No late submissions are acceptable for the second homework.

Course outline (subject to change with prior notification):

 Lecture 1. Using empirical methods in international economics: time series models o Introduction to the course: review of topics to be covered. o Estimation of the ARMA models of time series. Box-Jenkins Methodology. Simple extensions of the ARMA model. (Enders, ch.2.2, 2.4, 2.8, 7.2; Kocenda, ch. 1.6, 3.1).  Lecture 2. Modeling exchange rate volatility: ARCH, GARCH. Identification. Estimation. Extensions. BDS test. (Enders, ch.3; Kocenda, ch. 3.7).  Exercise session 1 (computer class) based on Lectures 1-2. Introduction to TSP and Eviews. Estimation of ARMA models and applying Box-Jenkins methodology. Estimation of ARCH models. First Homework assignment due to Midterm.  Lecture 3. Use of forecasting methods in international economics. Basic principles of forecasting. Types of forecasting. Models of forecasting. (Enders, ch. 2.9; Hamilton, ch. 4; Ramanathan, ch. 11) 1  Lecture 4. Empirical papers on forecasting. Combining forecasts. Testing accuracy of forecasts. Krkoska and Teksoz (2005, 2006), Fischer and Harvey (1999)  Lecture 5. International Parity Conditions. Types of parity conditions. Empirical tests and evidence. (Wang, ch.3; Chowdhry, Roll and Xia (2005); Dutton and Strauss (1997))  Lecture 6. Exchange rate pass-through. Definition of concept. Empirical evidence. Banik and Biswas (2007); Coricelli, Jazbec, and Masten (2006); Ghosh and Rajan (2009).  Midterm Exam (covers the first part of the course)  Exercise session 2 (computer class) based on Lectures 3-6. Applying forecasting methods. Testing parity conditions. Exchange rate pass-through: paper replication. Second Homework assignment due to Final exam.  Lecture 7. Balassa-Samuelson effect. Definition. Underlying assumptions. Consequences. Empirical evidence. (Egert (2002), Mihaljek and Klau (2003)).  Lecture 8. International Trade: some extra empirical applications. Trade and environment. Trade and growth. Empirical assessment of comparative advantage gains. Antweiler, Copeland and Scott (2001); Bernhofen and Brown (2005); Frankel and Romer (1999).  Lecture 9. The Heckscher-Ohlin-Vanek Model. Short theoretical description. Approaches to testing the model. (Feenstra, ch.2; Krugman, ch.4; Davis and Weinstein (2001), Trefler (1995)).  Lecture 10. Gravity Equation. Definition of concept. Types of gravity equation. Empirical Applications. Approaches to testing gravity equation. (Feenstra, ch.5; Anderson and van Wincoop (2003); Babetskaia-Kukharchuk and Maurel (2004); Bergstrand (1985); Evenett and Kellner (2002); Badinger (2008).  Exercise session 3 (computer class) based on Lectures 7-10. Balassa-Samuelson effect: paper replication. Testing HOV model using STATA. Estimation of gravity equation.  Final exam (covers the second part of the course).

Readings: There is no principal textbook for the course. The course content is based on selected topics from textbooks and complemented by journal articles.

Supplementary Textbooks:

Enders, W. (2004). Applied Econometric Time Series, 2nd ed., John Wiley & Sons, Inc. Feenstra, R. (2004). Advanced International Trade: Theory and Evidence. Princeton University Press. Hamilton, J. (1994). Time Series Analysis, Princeton University Press. Kocenda, E., Cerny, A. (2007). Elements of Time Series Econometrics: An Applied Approach. Karolinum Press. Krugman, P. and Obstfeld, M. (2003). International Economics: Theory and Policy, 6th Edition, Addison-Wesley. Ramanathan, R. (1998). Introductory Econometrics with Applications, 4th ed., Harcourt Brace College Publishers. Wang, P. (2005). The Economics of Foreign Exchange and Global Finance. Springer.

Recommended articles (subject to change with prior notification):

Forecasting Fischer, I. and N. Harvey (1999). Combining Forecasts: What Information Do Judges Need to Outperform the Simple Average? International Journal of Forecasting. July 1999; 15(3): 227-246. 2 Krkoska L., Teksoz, U. (2005). Accuracy of growth forecasts for transition countries: Assessing ten years of EBRD forecasting, EBRD Working Paper 94. Krkoska L., Teksoz, U. (2006). Forecasting inflation for transition countries: How accurate are the EBRD forecasts? EBRD Working Paper 98.

International Parity Conditions Chowdhry, B., Roll, R., Xia, Y. (2005). Extracting Inflation from Stock Returns to Test Purchasing Power Parity, The American Economic Review, 95(1), 255-276. Dutton, M., Strauss, J. (1997). Cointegration Tests of Purchasing Power Parity: the Impact of Non-traded Goods. The Journal of International Morn T and Finance,16(3), 433-444.

Pass-through Banik, N., Biswas, B. (2007). Exchange Rate Pass-Through in the U.S. Automobile Market: A Cointegration Approach. The International Review of Economics and Finance, 16, 223–236.

Coricelli, F., Jazbec, B., Masten, I. (2006). Exchange Rate Pass-Through in EMU Acceding Countries: Empirical Analysis and Policy Implications, The Journal of Banking & Finance, 30, 1375–1391.

Ghosh, A., Rajan, R. (2009). Exchange Rate Pass-Through in Korea and Thailand: Trends and Determinants. Japan and the World Economy, 21, 55–70.

HOV model Davis, D., Weinstein, D. (2001). An Account of Global Factor Trade, The American Economic Review, 91, 1423- 1453. Trefler, D. (1995). The Case of the Missing Trade and Other Mysteries, The American Economic Review, 85, 1029-46. BS Effect Egert, B. (2002). Estimating the Impact of the Balassa-Samuelson Effect on Inflation and the Real Exchange Rate during the Transition. Economic Systems, 26, 1-66. Mihaljek, D., Klau, M. (2003). The Balassa-Samuelson Effect in Central Europe: a Disaggregated Analysis. BIS Working Paper #143.

Gravity Equation Anderson, J., van Wincoop, E. (2003). Gravity with Gravitas: A Solution to the Border Puzzle. The American Economic Review, 93(1), 170-192. Babetskaia-Kukharchuk, O., Maurel, M. (2004). Russia’s Accession to the WTO: the Potential for Trade Increase. The Journal of Comparative Economics, 32, 680-699. Badinger, H. (2008). Trade Policy and Productivity. The European Economic Review, 52, 867–891. Bergstrand, J. (1985). The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence. The Review of Economics and Statistics, 67(3), 474-481. Evenett, S., Keller, W. (2002). On Theories Explaining the Success of the Gravity Equation. The Journal of Political Economy, 110(2), 281-316. Trade Antweiler, W., Copeland, B., Scott, M. (2001). Is Free Trade Good for the Environment? The American Economic Review, 91(4), 877-908. Bernhofen, D., Brown, J. (2005). An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan. The American Economic Review, 95(1), 208-225. Frankel, J., Romer, D. (1999). Does Trade Cause Growth? The American Economic Review, 89(3), 379-399.