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An essential introduction to one of the most timely and important subjects in economics
International Macroeconomics presents a rigorous and theoretically elegant treatment of real-world international macroeconomic problems, incorporating the latest economic research while maintaining a microfounded, optimizing, and dynamic general equilibrium approach. This one-of-a-kind textbook introduces a basic model and applies it to fundamental questions in international economics, including the determinants of the current account in small and large economies, processes of adjustment to shocks, the determinants of the real exchange rate, the role of fixed and flexible exchange rates in models with nominal rigidities, and interactions between monetary and fiscal policy. The book confronts theoretical predictions using actual data, highlighting both the power and limits of given theories and encouraging critical thinking.
Provides a rigorous and elegant treatment of fundamental questions in international macroeconomics
Brings undergraduate and master's instruction in line with modern economic research
Follows a microfounded, optimizing, and dynamic general equilibrium approach
Addresses fundamental questions in international economics, such as the role of capital controls in the presence of financial frictions and balance-of-payments crises
Uses real-world data to test the predictions of theoretical models
Features a wealth of exercises at the end of each chapter that challenge students to hone their theoretical skills and scrutinize the empirical relevance of models
Accompanied by a website with lecture slides for every chapter
Contents
Preface
CHAPTER 1 Global Imbalances
1.1 The Balance of Payments
1.2 The Trade Balance and the Current Account
1.3 The Trade Balance and the Current Account across Countries
1.4 Imbalances in U.S. Trade with China
1.5 The Current Account and the Net International Investment Position
1.6 Valuation Changes and the Net International Investment Position
1.6.1 Examples of Valuation Changes
1.6.2 Valuation Changes in the United States
1.6.3 A Hypothetical NIIP That Excludes Valuation Changes
1.7 The NIIP—NIIParadox
1.7.1 Dark Matter
1.7.2 Return Differentials
1.7.3 The Flip Side of the NIIP—NII Paradox
1.8 Summing Up
1.9 Exercisessection.1.9
PART I Determinants of the Current Account
CHAPTER 2 Current Account Sustainability
2.1 Can a Country Run a Perpetual Trade Balance Deficit?
2.2 Can a Country Run a Perpetual Current Account Deficit?
2.3 Saving, Investment, and the Current Account
2.3.1 The Current Account as the Gap between Saving and Investment
2.3.2 The Current Account as the Gap between National Income and Domestic Absorption
2.4 Appendix: Perpetual Trade Balance and Current Account Deficits in Infinite Horizon Economies
2.5 Summing Up
2.6 Exercises
CHAPTER 3 An Intertemporal Theory of the Current Account
3.1 The Intertemporal Budget Constraint
3.2 The Lifetime Utility Function
3.3 The Optimal Intertemporal Allocation of Consumption
3.4 The Interest Rate Parity Condition
3.5 Equilibrium in the Small Open Economy
3.6 The Trade Balance and the Current Account
3.7 Adjustment to Temporary and Permanent Output Shocks
3.7.1 Adjustment to Temporary Output Shocks
3.7.2 Adjustment to Permanent Output Shocks
3.8 Anticipated Income Shocks
3.9 An Economy with Logarithmic Preferences
3.10 Summing Up
3.11 Exercises
CHAPTER 4 Terms of Trade, the World Interest Rate, Tariffs, and the Current Account
4.1 Terms of Trade Shocks
4.2 Terms of Trade Shocks and Imperfect Information
4.3 Imperfect Information, the Price of Copper, and the Chilean Current Account
4.4 World Interest Rate Shocks
4.5 Import Tariffs
4.5.1 A Temporary Increase in Import Tariffs
4.5.2 A Permanent Increase in Import Tariffs
4.5.3 An Anticipated Future Increase in Import Tariffs
4.6 Summing Up
4.7 Exercises
CHAPTER 5 Current Account Determination in a Production Economy
5.1 The Investment Decision of Firms
5.2 The Investment Schedule
5.2.1 The Profit Function
5.3 The Consumption-Saving Decision of Households
5.3.1 Effect of a Temporary Increase in Productivity on Consumption
5.3.2 Effect of an Anticipated Future Productivity Increase on Consumption
5.3.3 Effect of an Increase in the Interest Rate on Consumption
5.4 The Saving Schedule
5.5 The Current Account Schedule
5.6 Equilibrium in the Production Economy
5.6.1 Adjustment of the Current Account to Changes in the World Interest Rate
5.6.2 Adjustment of the Current Account to a Temporary Increase in Productivity
5.6.3 Adjustment of the Current Account to an Anticipated Future Productivity Increase
5.7 Equilibrium in the Production Economy: An Algebraic Approach
5.7.1 Adjustment to an Increase in the World Interest Rate
5.7.2 Adjustment to a Temporary Increase in Productivity
5.7.3 Adjustment to an Anticipated Future Increase in Productivity
5.8 The Terms of Trade in the Production Economy
5.9 An Application: Giant Oil Discoveries
5.10 Summing Up
5.11 Exercises
CHAPTER 6 Uncertainty and the Current Account
6.1 The Great Moderation
6.2 Causes of the Great Moderation
6.3 The Great Moderation and the Emergence of Current Account Imbalances
6.4 An Open Economy with Uncertainty
6.5 Complete Asset Markets and the Current Account
6.5.1 State Contingent Claims
6.5.2 The Household's Problem
6.5.3 Free Capital Mobility
6.5.4 Equilibrium in the Complete Asset Market Economy
6.6 Summing Up
6.7 Exercises
CHAPTER 7 Large Open Economies
7.1 A Two-Country Economy
7.2 An Investment Surge in the United States
7.3 Microfoundations of the Two-Country Model
7.4 International Transmission of Country-Specific Shocks
7.5 Country Size and the International Transmission Mechanism
7.6 Explaining the U.S. Current Account Deficit: The Global Saving Glut Hypothesis
7.6.1 Two Competing Hypotheses
7.6.2 The Made in the U.S.A. Hypothesis Strikes Back
7.7 Summing Up
7.8 Exercises
CHAPTER 8 The Twin Deficits: Fiscal Deficits and the Current Account
8.1 An Open Economy with a Government Sector
8.1.1 The Government
8.1.2 Firms
8.1.3 Households
8.2 Ricardian Equivalence
8.3 Government Spending and Twin Deficits
8.4 Failure of Ricardian Equivalence: Tax Cuts and Twin Deficits
8.4.1 Borrowing Constraints
8.4.2 Intergenerational Effects
8.4.3 Distortionary Taxation
8.5 The Optimality of Twin Deficits
8.6 Fiscal Policy in Economies with Imperfect Capital Mobility
8.7 Fiscal Policy in a Large Open Economy
8.8 Summing Up
8.9 Exercises
PART II The Real Exchange Rate
CHAPTER 9 The Real Exchange Rate and Purchasing Power Parity
9.1 The Law of One Price
9.2 Purchasing Power Parity
9.3 PPP Exchange Rates
9.3.1 Big Mac PPP Exchange Rates
9.3.2 PPP Exchange Rates for Baskets of Goods
9.3.3 PPP Exchange Rates and Standard of Living Comparisons
9.3.4 Rich Countries Are More Expensive Than Poor Countries
9.4 Relative Purchasing Power Parity
9.4.1 Does Relative PPP Hold in the Long Run?
9.4.2 Does Relative PPP Hold in the Short Run?
9.5 How Wide Is the Border?
9.6 Nontradable Goods and Deviations from Purchasing Power Parity
9.7 Trade Barriers and Real Exchange Rates
9.8 Home Bias and the Real Exchange Rate
9.9 Price Indices and Standards of Living
9.9.1 Microfoundations of the Price Level
9.9.2 The Price Level, Income, and Welfare
9.10 Summing Up
9.11 Exercises
CHAPTER 10 Determinants of the Real Exchange Rate
10.1 The TNT Model
10.1.1 Households
10.1.2 Equilibrium
10.1.3 Adjustment of the Relative Price of Nontradables to Interest Rate and Endowment Shocks
10.2 From the Relative Price of Nontradables to the Real Exchange Rate
10.3 The Terms of Trade and the Real Exchange Rate
10.4 Sudden Stops
10.4.1 A Sudden Stop through the Lens of the TNT Model
10.4.2 The Argentine Sudden Stop of 2001
10.4.3 The Icelandic Sudden Stop of 2008
10.5 The TNT Model with Sectoral Production
10.5.1 The Production Possibility Frontier
10.5.2 The PPF and the Real Exchange Rate
10.5.3 The Income Expansion Path
10.5.4 Partial Equilibrium
10.5.5 General Equilibrium
10.5.6 Sudden Stops and Sectoral Reallocations
10.6 Productivity Differentials and Real Exchange Rates: The Balassa-Samuelson Model
10.7 Summing Up
10.8 Exercises
PART III International Capital Mobility
CHAPTER 11 International Capital Market Integration
11.1 Covered Interest Rate Parity
11.2 Covered Interest Rate Differentials in China: 1998-2021
11.3 Capital Controls and Interest Rate Differentials: Brazil 2009-2012
11.4 Empirical Evidence on Covered Interest Rate Differentials: A Long-Run Perspective
11.5 Empirical Evidence on Offshore-Onshore Interest Rate Differentials
11.6 Uncovered Interest Rate Parity
11.6.1 Asset Pricing in an Open Economy
11.6.2 CIP as an Equilibrium Condition
11.6.3 Is UIP an Equilibrium Condition?
11.6.4 Carry Trade as a Test of UIP
11.6.5 The Forward Premium Puzzle
11.7 Real Interest Rate Parity
11.8 Saving-Investment Correlations
11.9 Summing Up
11.10 Exercises
CHAPTER 12 Capital Controls
12.1 Capital Controls and Interest Rate Differentials
12.2 Macroeconomic Effects of Capital Controls
12.2.1 Effects of Capital Controls on Consumption, Savings, and the Current Account
12.2.2 Effects of Capital Controls on Investment
12.2.3 Welfare Consequences of Capital Controls
12.3 Quantitative Restrictions on Capital Flows
12.4 Borrowing Externalities and Optimal Capital Controls
12.4.1 An Economy with a Debt-Elastic Interest Rate
12.4.2 Competitive Equilibrium without Government Intervention
12.4.3 The Efficient Allocation
12.4.4 Optimal Capital Control Policy
12.5 Capital Mobility in a Large Economy
12.6 Graphical Analysis of Equilibrium under Free Capital Mobility in a Large Economy
12.7 Optimal Capital Controls in a Large Economy
12.8 Graphical Analysis of Optimal Capital Controls in a Large Economy
12.9 Retaliation
12.10 Empirical Evidence on Capital Controls around the World
12.11 Summing Up
12.12 Exercises
PART IV Monetary Policy and Exchange Rates
CHAPTER 13 Nominal Rigidity, Exchange Rate Policy, and Unemployment
13.1 The TNT-DNWR Model
13.1.1 The Supply Schedule
13.1.2 The Demand Schedule
13.1.3 The Labor Market Slackness Condition
13.1.4 Equilibrium in the TNT-DNWR Model
13.2 Adjustment to Shocks with a Fixed Exchange Rate
13.2.1 An Increase in the World Interest Rate
13.2.2 Asymmetric Adjustment: A Decrease in the World Interest Rate
13.2.3 Output and Terms of Trade Shocks
13.2.4 Volatility and Average Unemployment
13.3 Adjustment to Shocks with a Floating Exchange Rate
13.3.1 Adjustment to External Shocks
13.3.2 Supply Shocks, the Inflation-Unemployment Trade-off, and Stagflation
13.4 A Numerical Example: A World Interest Rate Hike
13.4.1 The Pre-Shock Equilibrium
13.4.2 Adjustment with a Fixed Exchange Rate
13.4.3 Adjustment with a Floating Exchange Rate
13.4.4 The Welfare Cost of a Currency Peg
13.5 The Monetary Policy Trilemma
13.6 Exchange Rate Overshooting
13.7 Empirical Evidence on Downward Nominal Wage Rigidity
13.7.1 Evidence from U.S. Micro Data
13.7.2 Evidence from the Great Depression
13.7.3 Evidence from Emerging Countries
13.8 Appendix
13.9 Summing Up
13.10 Exercises
CHAPTER 14 Managing Currency Pegs
14.1 A Boom-Bust Cycle in the TNT-DNWR Model
14.2 The Currency Peg Externality
14.3 Managing a Currency Peg
14.3.1 Macroprudential Capital Control Policy
14.3.2 Fiscal Devaluations
14.3.3 Higher Inflation in a Monetary Union
14.4 The Boom-Bust Cycle in Peripheral Europe, 2000-2011
14.5 Summing Up
14.6 Exercises
CHAPTER 15 Inflationary Finance and Balance of Payments Crises
15.1 The Quantity Theory of Money
15.1.1 A Flexible Exchange Rate Regime
15.1.2 A Fixed Exchange Rate Regime
15.2 A Monetary Economy with a Government Sector
15.2.1 An Interest-Elastic Demand for Money
15.2.2 Purchasing Power Parity
15.2.3 The Interest Parity Condition
15.2.4 The Government Budget Constraint
15.3 Fiscal Deficits and the Sustainability of Currency Pegs
15.4 Fiscal Consequences of a Devaluation
15.5 A Constant Money Growth Rate Regime
15.6 Fiscal Consequences of Money Creation
15.6.1 The Inflation Tax
15.6.2 The Inflation Tax Laffer Curve
15.6.3 Inflationary Finance
15.7 Balance of Payments Crises
15.8 Appendix: A Dynamic Optimizing Model of the Demand for Money
15.9 Summing Up
15.10 Exercises
Index
