University of Texas at Austin

Economics 339L: INTERNATIONAL FINANCE Course Outline Fall 2016 Unique number 34085 T, Th 2:00–3:30 (CLA 1.104)

Instructor: Dr. Valerie R. Bencivenga Office: BRB 3.102C Office hours (Fall 2016): T, Th 11:00-12:30 Phone: 512-475-8509 Email: [email protected] (course email) or [email protected] (for confidential emails) The best ways to contact me are by email and in person during class or in office hours. If I don’t answer my phone, do not leave a phone message—send an email. Use the course email for most emails; use my UT email for confidential emails. INTRODUCTION International finance produces dramatic stories of financial wealth flowing from one country to another, currencies crashing, and sovereign default. At the same time, the foreign exchange market and financial globalization generate broad-based gains in living standards, every day. Each actor in the complex world of international finance knows that exchange rate regimes can fall apart, currencies can rise or fall, and countries can default either explicitly or by inflating away their debt—and they know there are monetary and fiscal policies making these events more or less likely. Furthermore, they know all countries have only a limited ability to commit themselves to good policies. This course is an integrated exploration of foreign exchange markets; international markets for private and sovereign debt; exchange rate regimes; and monetary and fiscal policies in interlinked national economies. We will see that the same complexity that creates opportunities for gain also leaves room for currency crises, financial crises, and sovereign debt crises. For centuries, countries have tried to capture the gains while stabilizing their own economies in the face of “shocks” from abroad. Understanding the exchange rate arrangements that countries have adopted to this end is essential to understanding the euro-zone crisis and other crises (Mexican peso crisis, Asian economic crisis, etc.); the yuan-US dollar exchange rate; the policy challenges faced by emerging market economies, such as Brazil; and many more important economic episodes and events. COURSE DESCRIPTION The course begins with core material of international finance (exchange rates, foreign exchange markets, and the short-run and long-run relationships among exchange rates, interest rates, price levels, inflation rates, and real incomes). Next we’ll cover the fundamentals of open-economy macroeconomics (balance of payments, international borrowing and lending, and the short-run impact of monetary and fiscal policies). Following this, we’ll explore different exchange rate regimes (fixed exchange rates, currency boards, and currency areas such as the euro zone)—how they work, why countries adopt them, requirements for them to succeed, and reasons why they fail. Finally, we’ll study financial crises and currency crashes, including relevant aspects of the global financial crisis of 2007-9, the euro-zone crisis that started in 2010, the collapse of Argentina’s currency board in 2002, the Asian economic crisis of 1998-9, the Mexican peso crisis of 1994-5, and other historical episodes.

COURSE GOALS At the conclusion of this course, you will understand the fundamental and short-run forces that determine exchange rates, how foreign exchange markets work, basic financial instruments based on exchange rates, the costs and benefits of various exchange rate regimes, the relationship between interest rates and exchange rates, and the relationship between capital flows and exchange rates. You also will understand the circumstances leading countries to choose different exchange rate regimes, and the circumstances leading to currency crises and financial crises. This material will contribute to your understanding of economic history, economic development, policy debates about levels of government debt, monetary policy, exchange rate regimes, and financial market regulation, and conditions facing international businesses. PREREQUISITES Eco 420K and Eco 320L with a grade of at least C- in each. TEXTBOOKS The required book is International Macroeconomics, 3rd edition, by Robert C. FEENSTRA and Alan M. TAYLOR (Worth, 2014). Alternatively, you may use International Economics, 3rd edition, which includes both the international trade and international macro “splits”. EVALUATION Your course grade will be based on two midterm exams (25% each), a final exam (25%), homework assignments (15%), and in-class work (10%). Homework assignments have different numbers of points. Exams in this course are not cumulative. Your weighted average course score will be computed from your scores on these components, and a grade will be assigned based on your score relative to the distribution of scores in the class. This approach allows me to assign letter grades without an absolute scale, and to adjust the percentages of the class receiving different letter grades (within limits). The percentage of students receiving any particular letter grade is not predetermined. It is possible for all students to get a C or above, and for the large majority to receive an A or a B. However, lower grades will be assigned to students who do not demonstrate proficiency or mastery of the material. Pluses and minuses will be used. EXAMS The midterm exams will be evening exams. Dates and times for the exams are as follows: Midterm #1: Tuesday Sep. 27 from 7:00 to 9:00 pm, CLA 0.126 Midterm #2: Tuesday Nov. 1 from 7:00 to 9:00 pm, CLA 0.126 Final exam (not cumulative): Wednesday Dec. 14, 2:00 to 5:00pm (confirm date, time, and location on the registrar’s web site) Let me know if you have a conflict that prevents you from taking either or both of the midterms with the rest of the class. If you have a conflict with work or another class, I will schedule your midterm at another time when you are available. Alternate time exams are almost always earlier in the day, or the day before. If you do not notify me of a possible conflict by Fri., Sept 9 at noon, I will assume you are available for the exams, and subsequent requests for an alternate time exam will not be considered (except for emergencies). As a general rule, there will be no makeup midterms. If you miss a midterm due to illness or a personal or family emergency, and if you provide me with documentation of the event, I will re-weight your other exams. You must take the final exam at the scheduled time unless you have a valid, documented reason. A request to take the final exam at an alternate time should be made well ahead. If an emergency prevents you from writing the final exam at the scheduled time, contact me by email at the earliest opportunity.

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After each midterm exam, tentative cutoffs between letter grades for the course (A, A-, B+, …) will be posted. Cutoffs given after the second midterm will be stated in terms of the average of your two midterm exam percentage scores, so you can see where you stand going into the final exam. Practice exams and answers will be posted on Canvas in advance of each exam, to help you study. HOMEWORK There will be a homework assignment for each chapter we will cover (nine in total). Tentative due dates are listed along with the schedule of topics and readings below. Each assignment will consist of a combination of theoretical and analytical problems, and questions based on one or more articles from sources such as The Financial Times, Wall Street Journal, VOX EU, and Project Syndicate, which I will provide. Be sure to write neatly and legibly; to show your work on the problems; and to label graphs clearly. Also, be sure to staple or paper-clip your answers. Assignments will be posted on Canvas. Most of the homework assignments are due in class. If you would like to submit your assignment early, submit it to BRB 1.116. Do not put your assignment under my office door or under the TA’s door. Three of the homework assignments are due on Mondays in BRB 1.116 (see below). This will allow the TA to solve these problems and answer questions about them, in the review sessions for the exams. Your homework will be graded and returned to you, but not necessarily before the exam. If you want a copy of your answers, make a copy before you submit the assignment IN-CLASS WORK During some lectures, there will be “in-class” work that counts for credit. In-class work will consist of problems we solve together in class, or applications of the models to current events (articles will be posted). You’ll write up the solutions or analysis during class, and turn in your solutions as you leave. Each day of in-class work will be graded as “satisfactory” (full credit), “unsatisfactory” (half-credit), or “not submitted” (zero). Each day of in-class work will count equally toward your “in-class work” percentage score. I will drop two lectures of in-class work (the two lowest scores), for each student. This will accommodate the normal needs of students, who occasionally must miss a lecture or two due to a mild illness, an interview, a missed bus, etc. I will not excuse more than two lectures of in-class work, except for a major illness or other major emergency. If you have a situation that will require you to miss more than two classes, please see me to discuss your situation. LECTURES Lectures will involve a combination of board work, discussion, and slides (pdf files and power point files). Lecture slides will contain point-form outlines, economic models (derivations and analysis of the models of this course, using equations and graphs, and applications to questions, current events, and policy issues), data, newspaper articles, etc. Most (but not all) lecture slides will be posted on Canvas, either before or after lecture. I may review answers to homework problems, exam questions, or other questions, and not post those slides. Some material will be covered only on the board, or in discussion. You are responsible for all material covered in lecture. You are expected to attend all lectures. Finally, lectures are designed assuming you have done the assigned reading before lecture. You will absorb material much more thoroughly if you have done the reading, since the material is cumulative even within each lecture. NOTE: When a student leaves partway through lecture, other students’ focus is disrupted, and my concentration is disrupted. If you come to lecture, you are expected to stay through the entire lecture. If you anticipate that you will not want to stay through the entire lecture, it is better not to come. If you need to leave early for a doctor appointment, job interview, etc., please let me know at the start of class or by email.

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CANVAS AND EMAIL This course will use Canvas for all posted material. Every time I post something, I’ll email the class from Canvas. You are responsible for all information emailed to the class from Canvas (by either the TA or me). In addition, you are responsible for all information contained in email exchanges directly between you and me, and you and the TA (using your email address from Canvas, or any other email address you have used when sending an email to me or the TA). The course email ([email protected]) is the best email to use if you require an alternate time or extended time exam; if you miss an exam due to illness or an emergency; and to ask questions about the course. The course email address may be accessed by the TA. If you’d like to email me on a confidential matter, please use my regular UT email ([email protected]). Please do not use Canvas messaging. On gmail, I can label emails in order to stay organized, and I can embed images into replies, which helps me answer questions. OFFICE HOURS My office hours will be T, Th 11:00 to 12:30, in BRB 3.102C. The TA’s office hours are _____. TEACHING ASSISTANT The TA for this course is _____. The TA’s office number is _____. His office hours are _____. The TA will email you about grades, review sessions, exam logistics, and other matters. You are responsible for information in emails from the TA. REVIEW SESSIONS The TA will hold a review session before each exam. In these reviews, the TA will go over answers to selected homework questions. Review sessions (dates, times, and locations) will be announced in Canvas. In addition, I will review during class on the days of MT#1 and MT#2. I’ll also hold a review session for the final exam.

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SCHEDULE OF TOPICS AND READINGS (TENTATIVE) Below are the topics and required readings from International Macroeconomics by FEENSTRA and TAYLOR (FT). In addition, articles on current events and policy issues from The Financial Times, Wall Street Journal, VOX EU, and Project Syndicate may be assigned on an on-going basis. I’ll post these added readings either as links or as files, on Canvas. The schedule is tentative. Depending on current events, some topics may take a different amount of time than is indicated. Weeks 1 – 2 (Aug. 25, 30, Sep. 1) The Global Macroeconomy (FT, ch. 1) Introduction to Exchange Rates and the Foreign Exchange Market (FT, ch. 2) Sep. 6: Ch. 2 HW due in class (HW #1) Weeks 3 – 4 (Sep. 6, 8, 13) Exchange Rates I: The Monetary Approach in the Long Run (FT, ch. 3) Deviations from Purchasing Power Parity (FT, ch. 11, Section 1) Sep. 15: Ch. 3 HW due in class (HW #2) Weeks 4 – 5 (Sep. 15, 20, 22) Exchange Rates II: The Asset Approach in the Short Run (FT, ch. 4) Deviations from Uncovered Interest Parity (FT, ch. 11, Section 2) Sep. 26 (Monday): Ch. 4 HW due in BRB 1.116 by noon (HW#3) MIDTERM EXAM #1: Tues. Sep. 27, 7:00-9:00 pm (CLA 0.126) Weeks 6 – 7 (Sep. 29, Oct. 4, 6) National and International Accounts: Income, Wealth, and the Balance of Payments (FT, ch. 5) Oct. 11: Ch. 5 HW due in class (HW #4) Weeks 8 – 9 (Oct 11, 13, 18) Balance of Payments I: The Gains from Financial Globalization (FT, ch. 6) Oct. 20: Ch. 6 HW due in class (HW #5) Weeks 9 – 10 (Oct 20, 25, 27) Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run (FT, ch. 7) The Global Macroeconomy and the 2007-2009 Crisis (FT, ch. 11, section 4) Oct. 31 (Monday): Ch. 7 HW due in BRB 1.116 by noon (HW#6) MIDTERM EXAM #2: Tues. Nov. 1, 7:00-9:00 pm (CLA 0.126) Weeks 11 – 12 (Nov. 3, 8, 10) Fixed vs. Floating: International Monetary Experience (FT, ch. 8) Nov. 15: Ch. 8 HW due in class (HW #7) Weeks 13 – 14 (Nov. 15, 17, 22) Exchange Rate Crises: How Pegs Work and How They Break (FT, ch. 9) Nov. 29: Ch. 9 HW due in class (HW #8) Week 15 (Nov. 29, Dec. 1) Debt and Default (FT, ch. 11, section 3) Dec. 5 (Monday, last class day): Ch. 11 HW due in BRB 1.116 by 4 pm (HW #9) FINAL EXAM (not cumulative): Wednesday Dec. 14, 2:00 to 5:00pm (confirm date, time, and location on the registrar’s web site)

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ACCOMMODATIONS FOR STUDENTS WITH DISABILITIES A student with a disability may request academic accommodations from Services for Students with Disabilities (512-471- 6259, http://www.utexas.edu/diversity/ddce/ssd/). SSD accepts documentation of the disability, and provides the student with letters for their instructors stating the appropriate accommodations. SSD also provides guidelines for informing instructors about needed accommodations. Please let me know of any accommodation(s) you will need as soon as possible. Even if you do not yet have your letter from SSD, it is helpful for organizing exams if I know a letter is on its way. In order to receive an accommodation, I need either the letter—or knowledge that the letter is on its way—at least as far ahead as specified by SSD guidelines for informing instructors. RELIGIOUS HOLY DAYS By UT Austin policy, you must notify me of your pending absence at least fourteen days prior to the date of observance of a religious holy day. If you must miss a class, an examination, or an assignment, in order to observe a religious holy day, you will be given an opportunity to complete the missed work within a reasonable amount of time after the absence. ACADEMIC INTEGRITY Each student in this course is expected to abide by the University of Texas Honor Code: The core values of The University of Texas at Austin are learning, discovery, freedom, leadership, individual opportunity, and responsibility. Each member of the university is expected to uphold these values through integrity, honesty, trust, fairness, and respect toward peers and community. Any work submitted by a student in this course for academic credit will be the student's own work. Prior to submitting your work, cooperative and collaborative learning is permitted—and indeed encouraged!—when preparing to do homework and to write exams. At the stage when you are figuring out how to do a homework problem, you are welcome to discuss with others how to set up the problem, and the strategy for solving it. Once you’ve solved the problem, you are welcome to compare your answer with those of others, and to discuss the sources of any differences between your answers. However, each student is expected to write up their own answers independently. If your answer(s) and those of another student are identical or too similar, this may be taken as evidence that you have not written up your answers independently. Should “copying” occur, both the student who copied work from another student and the student who gave material to be copied will receive a zero for the entire homework assignment, and failure of the course and University disciplinary action may be involved. Permissible collaboration should never involve one student having possession of another student’s answers (a copy of all or part of work done by someone else, in the form of an e-mail, a document attached to an email or on a flash drive or other storage device, or a hard copy, whether handwritten, photocopied, or printed). During exams, you must do your own work. Unless it is explicitly allowed, you may consult only the materials provided as part of the exam, and you may not look at notes, books, articles, etc., whether yours or anyone else’s. No communication of any kind is permitted between students during exams (written, verbal, non-verbal, etc.). You may not look at another student’s work, and you may not show another student your work. Any such behavior during the examinations will result in failure of the exam, and may lead to failure of the course and University disciplinary action. USE OF EMAIL FOR OFFICIAL CORRESPONDENCE TO STUDENTS All students should become familiar with the University's official email student notification policy. It is the student's responsibility to keep the University informed of any changes in his or her email address. Students are expected to check email on a frequent and regular basis in order to stay current with University communications, recognizing that certain communications may be time-critical. This includes emails from instructors. It is recommended that email be checked daily, but at a minimum, twice per week. The complete text of this policy and instructions for updating your email address are available at http://www.utexas.edu/its/help/utmail/1564. BEHAVIOR CONCERNS ADVICE LINE (BCAL) If you become worried about someone who is acting differently, you may call the Behavior Concerns Advice Line at 512-232- 5050 to discuss your concerns about their behavior. This service is provided by the Office of the Dean of Students, the Counseling and Mental Health Center (CMHC), the Employee Assistance Program (EAP), and the University of Texas Police Department (UTPD). Visit http://www.utexas.edu/safety/bcal for more information.

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