Tải bản đầy đủ

International finance and open economy macroeconomics second edition

Springer Texts in Business and Economics

Giancarlo Gandolfo

International
Finance and
Open-Economy
Macroeconomics
With contributions by Daniela Federici
Second Edition


Springer Texts in Business and Economics


More information about this series at http://www.springer.com/series/10099


Giancarlo Gandolfo

International Finance

and Open-Economy
Macroeconomics
Second Edition

With Contributions by Daniela Federici

123


Giancarlo Gandolfo
Classe di Scienze Morali
Accademia Nazionale dei Lincei
Rome, Italy

ISSN 2192-4333
ISSN 2192-4341 (electronic)
Springer Texts in Business and Economics
ISBN 978-3-662-49860-6
ISBN 978-3-662-49862-0 (eBook)
DOI 10.1007/978-3-662-49862-0
Library of Congress Control Number: 2016945040
© Springer-Verlag Berlin Heidelberg 2002, 2016
This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of
the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,
broadcasting, reproduction on microfilms or in any other physical way, and transmission or information
storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication
does not imply, even in the absence of a specific statement, that such names are exempt from the relevant
protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this book
are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or
the editors give a warranty, express or implied, with respect to the material contained herein or for any
errors or omissions that may have been made.
Printed on acid-free paper
This Springer imprint is published by Springer Nature
The registered company is Springer-Verlag GmbH Berlin Heidelberg


To the memory of my father


Edgardo Gandolfo



Preface

Following standard practice in international economics, I have always treated the
theory of international trade separately from international finance, thus writing my
International Economics textbook as a two-volume course (Vol. 1 on the theory of
international trade and Vol. 2 on international monetary theory). This text had two
editions, several reprints, and translations in other languages. However, the different
pace of the revisions of the two volumes suggested to make them self-contained and
independent from each other. The volume covering trade was published in 1998
(second edition 2014) under the title International Trade Theory and Policy. This
is the second edition of the volume covering international finance (the first edition
was published in 2001). This new edition contains a wealth of additional material
that has been introduced thanks to the suggestions of colleagues and students and to
the comments contained in book reviews. All has been thoroughly classroom tested
in both undergraduate and graduate courses in various universities in Italy and other
countries.
In the Preface to the first edition (1986) of International Economics, I wrote:
There is no lack of good international economics textbooks ranging from the elementary
to the advanced, so that an additional drop in this ocean calls for an explanation. In the
present writer’s opinion, there seems still to be room for a textbook which can be used
in both undergraduate and graduate courses, and which contains a wide range of topics,
including those usually omitted from other textbooks. These are the intentions behind the
present book, which is an outcrop from undergraduate and graduate courses in international
economics that the author has been holding at the University of Rome ‘La Sapienza’ since
1974, and from his ongoing research work in this field.
Accordingly, the work is organised as two-books-in-one by distributing the material
between text and appendices.
The treatment in the text is directed to undergraduate students and is mainly confined
to graphic analysis and to some elementary algebra, but it is assumed that the reader will
have a basic knowledge of economics. Each chapter has a mathematical appendix, where
(i) the topics treated in the text are examined at a level suitable for advanced undergraduate
or first-year graduate students, and (ii) generalizations and/or topics not treated in the text
(including some at the frontiers of research) are formally examined.
The text is self-contained, and the appendices can be read independently of the text
and can, therefore, also be used by students who already know ‘graphic’ international
economics and want to learn something about its mathematical counterpart. Of course the
connections between text and appendices are carefully indicated, so that the latter can be
used as mathematical appendices by the student who has mastered the text, and the text
vii


viii

Preface
can be used as graphic and literary exposition of the results derived mathematically in the
appendices by the student who has mastered these. [. . . ]

The present book maintains the same approach, in particular the unique two-tier
feature and the ample coverage of topics, including many at the frontiers of research,
whose often obscure mathematical aspects are fully clarified in the second tier.
This new edition has been thoroughly revised and enriched thanks to the numerous
contributions by Professor Daniela Federici that bring the book up-to-date.
I am grateful to the students from all over the world who have written me over the
years to indicate unclear points and misprints and to Guido Ascari, Marianna Belloc,
Andrea Bubula, Nicola Cetorelli, Giuseppe De Arcangelis, Vivek H. Dehejia,
Kieran P. Donaghy, Michele Gambera, the late Carlo Giannini, Bernardo Maggi,
Giovanna Paladino, Luca Ricci, Francesca Sanna Randaccio, the late Jerome L.
Stein, for their advice and comments.
None of the persons mentioned has any responsibility for possible deficiencies
that might remain.
Rome, Italy
January 2016

Giancarlo Gandolfo


Contents

Part I
1

International Finance and International Macroeconomics:
An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
1.1
Globalization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
1.2
Old and New Approaches to International Finance . . . . . . . . . . . . . . .
1.3
Structure of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
1.4
Small and Large Open Economies . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Part II
2

Introduction
3
5
6
7
8
9

The Basics

The Foreign Exchange Market . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.2
The Spot Exchange Market.. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.3
The Real Exchange Rate. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.4
The Effective Exchange Rate. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.5
The Forward Exchange Market . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.5.1 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.5.2 Various Covering Alternatives: Forward
Premium and Discount .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.6
The Transactors in the Foreign Exchange Market .. . . . . . . . . . . . . . . .
2.6.1 Speculators . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.6.2 Non-Speculators .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.6.3 Monetary Authorities . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.7
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.7.1 Futures .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.7.2 Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.7.3 Swap Transactions . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.7.4 Credit Derivatives . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.8
Eurodollars and Xeno-Currencies .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.9
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2.9.1 N-Point Arbitrage . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

13
13
15
18
21
22
22
23
27
27
28
29
29
29
30
31
33
34
35
35
37
ix


x

Contents

3

Exchange-Rate Regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
3.1
The Two Extremes, and Intermediate Regimes.. . . . . . . . . . . . . . . . . . .
3.2
The Bretton Woods System . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
3.2.1 The Monetary Authorities’ Intervention . . . . . . . . . . . . . . . . .
3.3
The Current Nonsystem . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
3.4
International Organisations .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
3.4.1 The IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
3.4.2 The World Bank . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

39
39
43
44
46
47
47
50
51

4

International Interest-Rate Parity Conditions . . . . . .. . . . . . . . . . . . . . . . . . . .
4.1
Covered Interest Arbitrage, and Covered Interest
Parity (CIP).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
4.2
Uncovered Interest Parity (UIP) .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
4.3
Uncovered Interest Parity with Risk Premium . . . . . . . . . . . . . . . . . . . .
4.4
Real Interest Parity .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
4.5
Efficiency of the Foreign Exchange Market . . .. . . . . . . . . . . . . . . . . . . .
4.6
Perfect Capital Mobility, Perfect Asset
Substitutability, and Interest Parity Conditions .. . . . . . . . . . . . . . . . . . .
4.7
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
4.7.1 Rational Expectations and Efficiency
of the Foreign Exchange Market . . . . .. . . . . . . . . . . . . . . . . . . .
4.7.2 The Peso Problem . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
4.7.3 The Siegel Paradox .. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

53

5

6

53
56
57
58
59
60
62
62
63
64
65

The Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
5.1
Balance-of-Payments Accounting and Presentation . . . . . . . . . . . . . .
5.1.1 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
5.1.2 Accounting Principles. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
5.1.3 Standard Components .. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
5.1.4 Capital Account . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
5.1.5 Financial Account .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
5.2
The Meaning of Surplus, Deficit, and Equilibrium
in the Balance of Payments .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

67
67
67
70
73
76
76

Real and Financial Flows in an Open Economy . . . .. . . . . . . . . . . . . . . . . . . .
6.1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
6.2
The Row Identities .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
6.3
The Column Identities . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
6.4
Derived Identities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
6.5
Identities Are Only Identities. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

85
85
87
89
91
93

80
83


Contents

Part III
7

8

xi

Flow Approaches

The Elasticity Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
7.1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
7.2
Critical Elasticities and the So-Called
Marshall-Lerner Condition . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
7.2.1 The Balance of Payments in Domestic Currency .. . . . . . .
7.2.2 The Balance of Payments in Foreign Currency .. . . . . . . . .
7.2.3 Elasticity Optimism vs Pessimism . . .. . . . . . . . . . . . . . . . . . . .
7.3
Foreign Exchange Market Equilibrium and Stability . . . . . . . . . . . . .
7.3.1 Derivation of the Demand and Supply
Schedules: Multiple Equilibria and Stability . . . . . . . . . . . .
7.4
Interrelations Between the Spot and Forward
Exchange Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
7.4.1 The Various Excess Demand Schedules . . . . . . . . . . . . . . . . .
7.4.2 Forward Market Equilibrium and the Spot Rate . . . . . . . . .
7.4.3 The Monetary Authorities’ Intervention . . . . . . . . . . . . . . . . .
7.5
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
7.5.1 The Critical Elasticities Condition . . .. . . . . . . . . . . . . . . . . . . .
7.5.2 The Stability of the Foreign Exchange Market . . . . . . . . . .
7.5.3 A Model for the Simultaneous Determination
of the Spot and Forward Exchange Rate . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Multiplier Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.1
The Basic Model .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.2
Balance-of-Payments Adjustment in the Case
of an Exogenous Increase in Exports . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.3
Balance-of-Payments Adjustment in the Case
of an Exogenous Increase in Imports . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.4
Intermediate Goods and the Multiplier . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.5
The Empirical Relevance of the Multiplier .. . .. . . . . . . . . . . . . . . . . . . .
8.6
The Transfer Problem .. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.6.1 The Classical Theory.. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.6.2 The Multiplier Theory . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.6.3 Observations and Qualifications .. . . . .. . . . . . . . . . . . . . . . . . . .
8.7
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8.7.1 The Multiplier Without Foreign Repercussions . . . . . . . . .
8.7.2 Foreign Repercussions in a n-Country Model . . . . . . . . . . .
8.7.3 Intermediate Goods and the Multiplier .. . . . . . . . . . . . . . . . . .
8.7.4 The Transfer Problem .. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

97
97
98
99
101
102
102
103
106
107
110
111
113
113
121
122
125
127
128
131
134
136
137
137
139
140
142
143
143
146
153
156
158


xii

9

Contents

An Integrated Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.1
Interaction Between Exchange Rate and Income
in the Adjustment Process . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.1.1 A Graphic Representation . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.1.2 Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.1.3 Comparative Statics and the Transfer Problem . . . . . . . . . .
9.2
The J-Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.3
The S-Curve .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.4
The Alleged Insulating Power of Flexible Exchange
Rates, and the International Propagation of Disturbances . . . . . . . .
9.5
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.5.1 A Simplified Version of the Laursen
and Metzler Model . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.5.2 The BB and RR Schedules . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.5.3 The J-Curve.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9.5.4 The Original Two-Country Version
of the Laursen and Metzler Model . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

10 The Mundell-Fleming Model . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.1 Introductory Remarks. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.2 Fixed Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.2.1 Graphic Representation of the Equilibrium
Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.2.2 Simultaneous Real, Monetary and External
Equilibrium: Stability . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.2.3 Comparative Statics . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.3 Flexible Exchange Rates . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.4 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.4.1 The Mundell-Fleming Model Under Fixed
Exchange Rates. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10.4.2 The Mundell-Fleming Model Under Flexible
Exchange Rates. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
11 Policy Implications of the Mundell-Fleming Model,
and the Assignment Problem .. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
11.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
11.2 Internal and External Balance, and the Assignment Problem.. . . .
11.2.1 The Assignment Problem . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
11.2.2 Observations and Qualifications .. . . . .. . . . . . . . . . . . . . . . . . . .
11.3 Flexible Exchange Rates . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
11.4 Perfect Capital Mobility . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
11.5 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
11.5.1 Monetary and Fiscal Policy Under Fixed
Exchange Rates. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

161
161
163
166
168
169
171
172
174
174
174
178
182
190
191
191
192
193
197
204
208
211
211
216
220
221
221
223
224
226
229
231
233
233


Contents

xiii

11.5.2 Monetary and Fiscal Policy Under Flexible
Exchange Rates. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 238
11.5.3 Perfect Capital Mobility . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 240
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 242
Part IV

Stock and Stock-Flow Approaches

12 The Monetary Approach to the Balance of Payments
and Related Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
12.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
12.2 The Classical (Humean) Price-Specie-Flow Mechanism . . . . . . . . .
12.3 The Monetary Approach to the Balance of Payments .. . . . . . . . . . . .
12.3.1 The Basic Propositions and Implications . . . . . . . . . . . . . . . .
12.3.2 A Simple Model .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
12.3.3 Does a Devaluation Help? . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
12.3.4 Concluding Remarks . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
12.4 The New Cambridge School of Economic Policy .. . . . . . . . . . . . . . . .
12.5 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
12.5.1 The Classical Theory.. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
12.5.2 The Monetary Approach to the Balance of Payments .. .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13 Portfolio and Macroeconomic Equilibrium in an Open Economy . . . .
13.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.2 Asset Stock Adjustment in a Partial Equilibrium Framework . . . .
13.3 Portfolio and Macroeconomic Equilibrium Under
Fixed Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.3.1 Introductory Remarks .. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.3.2 A Simple Model .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.3.3 Momentary and Long-Run Equilibrium.. . . . . . . . . . . . . . . . .
13.4 Portfolio and Macroeconomic Equilibrium under
Flexible Exchange Rates . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.4.1 Introductory Remarks .. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.4.2 The Basic Model . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.4.3 Static Expectations . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.4.4 Rational Expectations and Overshooting . . . . . . . . . . . . . . . .
13.5 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.5.1 Partial-Equilibrium Asset Adjustment . . . . . . . . . . . . . . . . . . .
13.5.2 Portfolio and Macroeconomic Equilibrium
Under Fixed Exchange Rates . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13.5.3 Portfolio and Macroeconomic Equilibrium
Under Flexible Exchange Rates . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

245
245
245
247
248
251
252
253
254
257
257
259
264
265
265
266
270
270
271
274
277
277
279
283
286
289
289
291
298
310

14 Growth in an Open Economy . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 311
14.1 Export-Led Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 312
14.1.1 The Lamfalussy Model . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 312


xiv

Contents

14.1.2 The Beckerman Model .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Growth and the Balance of Payments .. . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Balance-of-Payments Constrained Growth (Thirlwall) . . . . . . . . . . .
14.3.1 Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
14.4 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
14.4.1 Exports, Growth, and the Balance of Payments . . . . . . . . .
14.4.2 Dynamic Stability of Thirlwall’s Model . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
14.2
14.3

Part V

313
315
317
319
323
323
325
327

The Exchange Rate

15 Exchange-Rate Determination . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.1 The Purchasing-Power-Parity Theory .. . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.1.1 The Harrod-Balassa-Samuelson Model . . . . . . . . . . . . . . . . . .
15.2 The Traditional Flow Approach .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.3 The Modern Approach: Money and Assets
in Exchange-Rate Determination.. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.3.1 The Monetary Approach .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.3.2 Sticky Prices, Rational Expectations,
and Overshooting of the Exchange-Rate .. . . . . . . . . . . . . . . .
15.3.3 The Portfolio Approach .. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.4 The Exchange Rate in Macroeconometric Models .. . . . . . . . . . . . . . .
15.5 Exchange-Rate Determination: Empirical Studies . . . . . . . . . . . . . . . .
15.5.1 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.5.2 The Reactions to Meese and Rogoff,
and the Way Out . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.5.3 An Economy-Wide Model Beats the Random Walk . . . .
15.5.4 The Exchange Rate in Experimental Economics . . . . . . . .
15.6 Equilibrium Exchange Rates: BEERs, DEERs,
FEERs and All That . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.7 Chaos Theory and the Exchange Rate . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.8 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.8.1 PPP and the Harrod-Balassa-Samuelson Effect.. . . . . . . . .
15.8.2 The Dornbusch Overshooting Model.. . . . . . . . . . . . . . . . . . . .
15.8.3 The Modern Approach to Exchange-Rate
Determination . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15.8.4 Chaos Theory and the Exchange Rate. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16 Capital Movements, Speculation, and Currency Crises .. . . . . . . . . . . . . . .
16.1 Long-Term Capital Movements . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16.2 Short-Term Capital Movements and Foreign
Exchange Speculation . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16.2.1 Flexible Exchange Rates and Speculation . . . . . . . . . . . . . . .
16.3 Speculative Attacks, Currency Crises, and Contagion . . . . . . . . . . . .
16.3.1 A First Generation Model.. . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

333
333
335
336
336
337
339
342
346
349
349
351
352
353
354
355
357
357
358
359
368
380
385
385
388
390
392
393


Contents

xv

16.3.2 A Second Generation Model.. . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16.3.3 Third Generation Models . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16.3.4 Towards Fourth Generation Models? .. . . . . . . . . . . . . . . . . . . .
16.3.5 The Indicators Approach: Can Crises Be Forecast? . . . . .
16.3.6 Contagion .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16.4 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16.4.1 A First-Generation Model . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16.4.2 A Second-Generation Model . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16.4.3 Krugman’s Third Generation Model: The
Stabilization Dilemma . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

396
399
404
405
408
414
414
416

17 Fixed Vs Flexible Exchange Rates . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.1 The Traditional Arguments .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.2 The Modern View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.2.1 Money Demand Shock .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.2.2 Aggregate Demand Shock . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.2.3 Aggregate Supply Shock .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.2.4 Conclusion .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.3 The Experience of the Managed Float . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.3.1 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.3.2 New Light on an Old Debate? . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.4 Exchange-Rate Pass-Through . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.4.1 The Vicious Circle Depreciation-Inflation . . . . . . . . . . . . . . .
17.5 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.5.1 The Shock-Insulating Properties of Fixed
and Flexible Exchange Rates . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.5.2 The Effects of Various Shocks .. . . . . . .. . . . . . . . . . . . . . . . . . . .
17.5.3 The Intertemporal Approach .. . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17.5.4 The Simple Dynamics of the
Depreciation-Inflation Circle . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

423
423
426
427
427
427
429
429
429
431
435
438
441

Part VI

417
418

441
443
449
449
451

The Intertemporal Approach

18 The Intertemporal Approach to the Balance of Payments,
and the Real Exchange Rate.. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
18.1 Introduction: The Absorption Approach .. . . . . .. . . . . . . . . . . . . . . . . . . .
18.2 Intertemporal Decisions, the Current Account,
and Capital Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
18.2.1 The Feldstein-Horioka Puzzle . . . . . . . .. . . . . . . . . . . . . . . . . . . .
18.2.2 The Harberger-Laursen-Metzler Effect Again .. . . . . . . . . .
18.3 Intertemporal Approaches to the Real Exchange Rate . . . . . . . . . . . .
18.3.1 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
18.3.2 The RAIOM Approach . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
18.3.3 The NATREX Approach: An Overview . . . . . . . . . . . . . . . . .

457
457
460
463
464
465
465
465
468


xvi

Contents

18.3.4 A More Technical Presentation .. . . . . .. . . . . . . . . . . . . . . . . . . .
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
18.4.1 The Two-Period Case . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
18.4.2 The Harberger-Laursen-Metzler Effect . . . . . . . . . . . . . . . . . .
18.4.3 An Infinite Horizon Model.. . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
18.4.4 The RAIOM Approach to the Real Exchange Rate . . . . .
18.4.5 The NATREX Approach .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

470
476
476
478
480
483
486
494

19 Other Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
19.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
19.2 An Intertemporal Model with Endogenous Growth
in an Open Economy.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
19.2.1 The Net Borrower Economy .. . . . . . . . .. . . . . . . . . . . . . . . . . . . .
19.3 Nominal Rigidities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
19.3.1 Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
19.4 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
19.4.1 The Dynamic Optimization Problem .. . . . . . . . . . . . . . . . . . . .
19.4.2 The Net Borrower Nation .. . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
19.4.3 Nominal Rigidities . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

497
497

18.4

Part VII

497
501
502
506
507
507
511
515
525

International Monetary Integration

20 International Monetary Integration .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.2 The Theory of Optimum Currency Areas. . . . . .. . . . . . . . . . . . . . . . . . . .
20.2.1 The Traditional (or “Criteria”) Approach . . . . . . . . . . . . . . . .
20.2.2 The Cost-Benefit Approach .. . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.2.3 The New Theory . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.2.4 Optimum for Whom? . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.3 The Common Monetary Unit and the Basket Currency .. . . . . . . . . .
20.4 The Common Monetary Policy, the Inconsistent
Triad, and Fiscal Policy .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.4.1 Fiscal Policy Coordination .. . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.5 The Single-Currency Problem .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.6 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
20.6.1 Fiscal Policy in a Monetary Union . . .. . . . . . . . . . . . . . . . . . . .
20.6.2 Fiscal Coordination . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

529
529
530
531
533
536
538
538

21 The European Monetary Union . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
21.1 The European Monetary System . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
21.1.1 The EMS and the Theory of Optimum
Currency Areas .. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
21.2 The Maastricht Treaty and the Gradual Approach to EMU. . . . . . .

557
557

540
542
544
547
547
552
553

559
561


Contents

xvii

21.2.1 Further Developments.. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
21.2.2 Fiscal Governance .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
21.3 The Institutional Aspects . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
21.4 The Maastricht Criteria . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
21.5 The New Theory of Optimum Currency Areas and EMU . . . . . . . .
21.6 The Euro and the Dollar . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
21.6.1 The International Role of a Currency . . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Part VIII

563
567
568
570
573
576
578
579

Problems of the International Monetary
(Non)System

22 Key Events in the Postwar International Monetary System . . . . . . . . . . .
22.1 Introductory Remarks. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.2 Convertibility.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.3 Eurodollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.4 Special Drawing Rights. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.5 Collapse of Bretton Woods .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.6 Petrodollars.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.7 Demonetization of Gold . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.8 EMS and EMU .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.9 The International Debt Crisis. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
22.10 The Asian Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
23 International Liquidity, the Demand for International
Reserves, and Xeno-Markets . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
23.1 Introductory Remarks. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
23.2 The Descriptive Approach .. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
23.3 The Optimizing Approach .. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
23.4 Is International Liquidity Still a Problem?.. . . .. . . . . . . . . . . . . . . . . . . .
23.4.1 Some Facts and Puzzles .. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
23.5 The Composition of International Reserves . . .. . . . . . . . . . . . . . . . . . . .
23.6 The Analysis of Euro-Markets . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
23.6.1 The Fixed-Multiplier Approach . . . . . .. . . . . . . . . . . . . . . . . . . .
23.6.2 The Portfolio Approach to Euro-Markets .. . . . . . . . . . . . . . .
23.7 An Evaluation of the Costs and Benefits of Xeno-Markets .. . . . . .
23.8 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
23.8.1 The Maximization of a Welfare Function .. . . . . . . . . . . . . . .
23.8.2 Intertemporal Maximization and the
Normative Theory of Economic Policy . . . . . . . . . . . . . . . . . .
23.8.3 The Composition of International Reserves . . . . . . . . . . . . .
23.8.4 A Portfolio Model of the Euro-Market .. . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

585
585
587
588
588
591
594
594
597
597
598
599
601
601
602
604
606
606
609
611
611
612
614
616
616
619
624
626
630


xviii

Contents

24 Current Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.2 International Policy Coordination .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.2.1 Policy Optimization, Game Theory,
and International Coordination . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.2.2 The Problem of the Reference Model
and the Obstacles to Coordination.. . .. . . . . . . . . . . . . . . . . . . .
24.3 The Debt Problem.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.3.1 NATREX Model of External Debt and Real
Exchange Rate. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.4 The Subprime Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.5 Proposals for the International Management
of Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.5.1 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.5.2 McKinnon’s Global Monetary Objective . . . . . . . . . . . . . . . .
24.5.3 John Williamson’s Target Zones. . . . . .. . . . . . . . . . . . . . . . . . . .
24.5.4 The Tobin Tax . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.6 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.6.1 International Policy Coordination . . . .. . . . . . . . . . . . . . . . . . . .
24.6.2 Target Zones .. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24.6.3 The Tobin Tax . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
References .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

635
635
636
636
639
642
643
645
648
648
649
650
651
653
653
655
657
663

Index . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 667


List of Figures

Fig. 3.1

Monetary authorities’ intervention to peg the
exchange rate.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

45

Fig. 7.1
Fig. 7.2
Fig. 7.3
Fig. 7.4
Fig. 7.5

Multiple equilibria and stability . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The arbitrageurs’ excess demand for forward exchange .. . . . . . . . .
Commercial traders’ excess demand for forward exchange . . . . . .
Speculators’ excess demand for forward exchange . . . . . . . . . . . . . . .
Equilibrium in the forward exchange market ... . . . . . . . . . . . . . . . . . . .

105
108
109
110
111

Fig. 8.1

Exogenous increase in exports, the multiplier, and the
balance of payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 132
Exogenous increase in imports, the multiplier, and
the balance of payments: case (i) . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 135
Exogenous increase in imports, the multiplier, and
the balance of payments: case (ii) .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 135

Fig. 8.2
Fig. 8.3
Fig. 9.1
Fig. 9.2
Fig. 9.3
Fig. 9.4
Fig. 10.1
Fig. 10.2
Fig. 10.3
Fig. 10.4
Fig. 10.5
Fig. 10.6

Flexible exchange rates and the level of income: the
balance-of-payments schedule . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Flexible exchange rates and the level of income: the
real-equilibrium schedule . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Flexible exchange rates and the level of income:
the dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The transfer problem under flexible exchange rates.. . . . . . . . . . . . . .
Mundell-Fleming under fixed exchange rates: the real
equilibrium schedule.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Mundell-Fleming under fixed exchange rates: the
monetary equilibrium schedule . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Shifts in the monetary equilibrium schedule . .. . . . . . . . . . . . . . . . . . . .
Mundell-Fleming under fixed exchange rates: the
external-equilibrium schedule .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Mundell-Fleming under fixed exchange rates:
macroeconomic equilibrium.. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Mundell-Fleming under fixed exchange rates:
dynamic analysis of the adjustment process .. .. . . . . . . . . . . . . . . . . . . .

163
165
165
168
193
194
195
196
198
200
xix


xx

List of Figures

Fig. 10.7
Fig. 10.8
Fig. 10.9
Fig. 10.10

The burden of interest payments and the BB schedule.. . . . . . . . . . .
The transfer problem under fixed exchange rates . . . . . . . . . . . . . . . . .
Effects of a once-and-for-all devaluation . . . . . .. . . . . . . . . . . . . . . . . . . .
The Mundell-Fleming model under flexible exchange rates .. . . . .

Fig. 11.1

Fiscal and monetary policy for internal and external
balance under fixed exchange rates: first case .. . . . . . . . . . . . . . . . . . . .
Fiscal and monetary policy for internal and external
balance under fixed exchange rates: second case.. . . . . . . . . . . . . . . . .
Flexible exchange rates and policies for internal and
external balance: high capital mobility . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Flexible exchange rates and policies for internal and
external balance: low capital mobility . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Perfect capital mobility and fiscal and monetary
policy under fixed and flexible exchange rates . . . . . . . . . . . . . . . . . . . .

Fig. 11.2
Fig. 11.3
Fig. 11.4
Fig. 11.5
Fig. 13.1
Fig. 13.2
Fig. 13.3

203
205
207
209
223
224
230
230
232

Determination of portfolio equilibrium in an open economy .. . . .
Monetary policy, portfolio equilibrium and capital flows .. . . . . . . .
Static expectations: short-run equilibrium and
economic policy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Rational expectations: short-run equilibrium and
economic policy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Rational expectations and long-run equilibrium . . . . . . . . . . . . . . . . . .
Rational expectations, news, and overshooting.. . . . . . . . . . . . . . . . . . .

268
270

342

Fig. 15.3
Fig. 15.4
Fig. 15.5
Fig. 15.6

Rational expectations and exchange-rate overshooting . . . . . . . . . . .
Exchange-rate determination: interaction between the
current account and the capital account.. . . . . . .. . . . . . . . . . . . . . . . . . . .
Observed and estimated values.. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Phase diagram .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Power spectrum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Correlation dimension . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Fig. 16.1
Fig. 16.2
Fig. 16.3

An example of profitable destabilizing speculation . . . . . . . . . . . . . . . 390
Debt levels, crises, and multiple equilibria . . . .. . . . . . . . . . . . . . . . . . . . 398
Balance sheets and financial crises. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 403

Fig. 18.1
Fig. 18.2
Fig. 18.3
Fig. 18.4

Intertemporal trade: pure consumption . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Intertemporal trade: production and investment .. . . . . . . . . . . . . . . . . .
The NATREX model: medium-run dynamics .. . . . . . . . . . . . . . . . . . . .
The NATREX model: long-run dynamics . . . . .. . . . . . . . . . . . . . . . . . . .

Fig. 23.1
Fig. 23.2

The portfolio approach to the Euro-market .. . .. . . . . . . . . . . . . . . . . . . . 613
The dynamics of the optimum reserve level . . .. . . . . . . . . . . . . . . . . . . . 621

Fig. 24.1
Fig. 24.2

The Hamada diagram .. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 637
The international policy game: Cournot-Nash,
Stackelberg, and cooperative solution . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 639

Fig. 13.4
Fig. 13.5
Fig. 13.6
Fig. 15.1
Fig. 15.2

284
286
287
288

345
376
377
377
378

461
463
474
475


List of Tables

Table 3.1

Exchange rate arrangements, 2009–2014 (percent of
IMF members) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

43

Table 6.1

An accounting matrix for real and financial flows . . . . . . . . . . . . . . . .

86

Table 15.1

Estimation results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 375

Table 18.1

Effects of a devaluation according to the absorption approach .. . 458

Table 24.1

Payoff matrix of the international policy game . . . . . . . . . . . . . . . . . . . 636

xxi


Part I
Introduction


1

International Finance and International
Macroeconomics: An Overview

While several specialistic fields of economics have been developed as distinct
branches of general economic theory only in relatively recent times, the presence
of a specific treatment of the theory of international economic transactions is an
old and consolidated tradition in the economic literature. Various reasons can be
advanced to explain the need for this specific treatment, but the main ones are the
following.
The first is that factors of production are generally less mobile between countries
than within a single country. Traditionally, this observation has been taken as a starting point for the development of a theory of international trade based on the extreme
assumption of perfect national mobility and perfect international immobility of the
factors of production, accompanied by the assumption of perfect mobility (both
within and between countries) of the commodities produced, exception being made
for possible restrictive measures on the part of governments.
The second is the fact that the mere presence of different countries as distinct
political entities each with its own frontiers gives rise to a series of problems
which do not occur in general economics, such as the levying of duties and other
impediments to trade, the existence of different national currencies whose relative
prices (the exchange rates) possibly vary through time, etc.
The specialistic nature of international economics—a discipline of increasing
importance given the increasing openness and interdependence of the single national
economic systems—does not mean that its methods and tools of analysis are
different from those of general economic theory: on the contrary, international
economics makes ample use of the methods and tools of microeconomics and
macroeconomics, as we shall see presently.
As in any other discipline, also in international economics we can distinguish a
theoretical and a descriptive part. The former is further divided into the theory of
international trade and international monetary economics. All these distinctions
are of a logical and pedagogical nature, but of course both the descriptive and

© Springer-Verlag Berlin Heidelberg 2016
G. Gandolfo, International Finance and Open-Economy Macroeconomics,
Springer Texts in Business and Economics, DOI 10.1007/978-3-662-49862-0_1

3


4

1 International Finance and International Macroeconomics: An Overview

the theoretical part, both the trade and the monetary branch, are necessary for an
understanding of the international economic relations in the real world.
The descriptive part, as the name clearly shows, is concerned with the description
of international economic transactions just as they happen and of the institutional
context in which they take place: flows of goods and financial assets, international
agreements, international organizations like the World Trade Organization and the
European Union, and so forth.
The theoretical part tries to go beyond the phenomena to seek general principles
and logical frameworks which can serve as a guide to the understanding of actual
events (so as, possibly, to influence them through policy interventions). Like any
economic theory, it uses for this purpose abstractions and models, often expressed
in mathematical form. The theoretical part can be further divided, as we said
above, into trade and monetary theory each containing aspects of both positive
and normative economics; although these aspects are strictly intertwined in our
discipline, they are usually presented separately for didactic convenience.
A few words are now in order on the distinction between international trade
theory and international monetary economics.
The theory of international trade (which has an essentially microeconomic
nature) deals with the causes, the structure and the volume of international trade
(that is, which goods are exported, which are imported, and why, by each country,
and what is their amount); with the gains from international trade and how these
gains are distributed; with the determination of the relative prices of goods in
the world economy; with international specialization; with the effects of tariffs,
quotas and other impediments to trade; with the effects of international trade on
the domestic structure of production and consumption; with the effects of domestic
economic growth on international trade and vice versa; and so on. The distinctive
feature of the theory of international trade is the assumption that trade takes place
in the form of barter (or that money, if present, is only a veil having no influence
on the underlying real variables but serving only as a reference unit, the numéraire).
A by-no-means secondary consequence of this assumption is that the international
accounts of any country vis-à-vis all the others always balance: that is, no balanceof-payments problem exists.
This part of international economics was once also called the pure theory of
international trade, where the adjective “pure” was meant to distinguish it from
monetary international economics.
International finance, also called international monetary economics (which is
essentially of a macroeconomic nature) is often identified with open-economy
macroeconomics or international macroeconomics because it deals with the monetary and macroeconomic relations between countries. Although there are nuances in
the meaning of the various labels, we shall ignore them and take it that our field deals
with the problems deriving from balance-of-payments disequilibria in a monetary
economy, and in particular with the automatic adjustment mechanisms and the
adjustment policies concerning the balance of payments; with the relationships
between the balance of payments and other macroeconomic variables; with the
various exchange-rate regimes and exchange-rate determination; with international


Tài liệu bạn tìm kiếm đã sẵn sàng tải về

Tải bản đầy đủ ngay

×