Endorsements There is no real precedent for this original book. The authors have taken a field in which there are often quite different models authors have taken a field in which there are often quite different models that sometimes yield quite disparate results, and have provided a unifying framework for examining the issues. An aspect that I find especially appealing is that the text does not assume much background on the part of students. Ostfeld and Rogoff provide a framework for understanding these issues that is firmly grounded in economic theory and rich in its empirical insights and predictions. Their book will no doubt be the most widely used text for graduate education during the next decade.
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ISBN 1, Intemational economic relations, 1. Dynamics of the Current Account Box 2. We are unaware of any previous attempt to accomplish this goal using modern analytical methods.
This project arose from our concern over the widespread view that open- economy macroeconomics also known as international finance has become an extremely scattered field, defined more by the people who consider themselves working in it than by any set of unifying ideas. The problem was brought home forcefully in an informal survey conducted by Professor Alan Deardorff of the University of Michigan.
In , Deardorff gathered graduate international finance reading lists from eight top economics departments, hoping to find a consensus on which readings should be deemed most essential. To his surprise, he found strikingly little agreement, with only one article appearing on more than half the reading lists.
Such idiosyncrasies will come as no surprise to those who have stud- ied international macroeconomics in graduate school. Whereas most students find the major issues compelling, constant complaint is that the material lacks a uni- fied theme and that radical gear shifts are needed to move from one topic to the next.
Some senior economists at leading departments view the state of the field with such dismay that they teach mostly from articles written in the s and s, or at least articles that should have been written then , disdaining the modern lit- erature for its alleged lack of policy relevance.
While the classic literature from twenty and thirty years ago can be admired for articulating and attempting to formalize a number of central policy issues, its limitations are many. The classic approach lacks the microfoundations needed for internal consistency, it fails to deal with dynamics in any coherent way, and its vi- sion of capital market integration may generously be described as narrow.
We realized that many areas would have to be substantially reformulated, and frankly hoped that some of the gaps would be fortuitously filled in by other researchers over the life of the project.
This did happen, but only in small doses. The approach we took is the subject of Chapter 10, The reader will have to judge for himself or herself how successful we have been in our goal of offering a unified framework, Whereas we do not pretend that any one model can encompass all issues, you should find that most models and themes we develop appear several times in the book, sometimes in seemingly widely disparate contexts.
The authors of any manuscript this length must stand ready to be accused of self-indulgence. We trust the reader will agree that part of the length is explained by our deliberate attempt to make the chapters easy to follow. We fill in many intermediate steps to guide students through the central models, hoping to save them the frustrations we ourselves often feel when trying to follow the mathematics of elegant but tersely expressed articles.
We also devote a considerable amount of attention to providing empirical motivation for the main concepts and them: introduce. Our notion of empirical evidence is a broad one. If there exists a careful econometric study that casts light on a question we ask, we try to discuss it, But if the best evidence is a suggestive diagram or a relatively unsophisticated regression, we still offer it to illustrate our concepts if not to test them.
How did we ultimately decide on the specific topies to be covered? Two cri- teria strongly influenced our choices. We biased our selection toward topics that we felt we could integrate with our central microfoundations approach and toward topics for which there seemed to exist an interesting empirical literature. With little exception, nothing appears in the book that is not based on explicit microfounda- tions. But we have not been so dogmatic as to exclude the most influential ad hoc aggregative models completely.
In each case, however, we go on to show how similar ideas could be expressed in models with microfoundations. Though we try to be up to date, we have also tried not to be slaves to fashion. But we think the relatively small number of pages we devote to the topic is the right proportion for this book, and we make no apologies for not including an entire chapter on the subject.
Other topics such as European Monetary Union on which both of us have written are of great current interest, but the relevant academic literature consists largely of narratives and applications of seasoned theory. We examine optimal cur- rency areas in Chapter 9, but not nearly as extensively as others might have chosen to do, We genuinely regret not having more space left over to deal with questions of political economy.
We do cover these to some extent in our discussion of inter- national debt and exchange rate policy. But again much of the literature uses rather stylized descriptive models that did not easily fit into our general approach, and so we leave that important subject for later work. Some inwardly oriented macroeconomists may look at our coverage and feel that we have somehow usurped standard topics from macro such as growth or inflation.
We do not see how anyone can. The United States now trades extensively, and even Albania has opened up to the outside world. There are no closed economies, and there are no virtually closed economies. There are only open national economies and the global economy. Macroeconomics is not the only field our analysis crosses. We freely draw on finance and interna- tional trade theory throughout. However, we do not necessarily expect our readers to be conversant with all of these topics, and we generally develop any necessary concepts from the ground up.
Finally, the question may arise as to how we intend that this book be used. Is it a treatise? Is it for the core of a graduate international finance course? Or is it aimed at first-year graduate macroeconomics?
In Chapter 5, we demonstrate the remarkable analogy between modern finance models incorporating nonexpected utility preferences and standard open-economy intertemporal models that allow for multiple consumption goods. Chapter 6 on in- ternational debt contains a number of new results, for example, on the relationship between investment and foreign debt levels.
In Chapter 8, we show how to develop a simple tractable general equilibrium model for nominal asset pricing that is more plausible empirically than the alternatives in the existing literature. Second-year graduate international finance students are certainly an important constituency.
We appreciate that this book cannot easily be covered in a semester, but one can conveniently choose parts of it as the basis for a course and use read- ings to cover other recent research developments.
Second-year students may be able to skim fairly quickly past some parts of Chapters 1 through 3, provided this, material was adequately covered in their first-year macroeconomics course. As for a first-year macro course, our coverage is fairly comprehensive, although naturally the choice of topics is biased toward open-economy issues.
We hope that both first- and second-year students will appreciate our efforts at working through the models algorithmically, provid- ing many intermediate steps along the way. Apologies: Although our book includes extensive citations, space limitations simply make it impossible to provide the intellectual history behind every idea There are numerous excellent surveys many of which we reference that are more suitable for this purpose. We also regret and accept full responsibility for the hopefully small number of erroneous attributions, equation typos, and other mis- takes that may have crept into the manuscript.
In this regard we are especially grateful to Kiminori Matsuyama, who provided valuable criticisms of early drafts of Chapters 1 through 3 and 9, and to Reuven Glick, who read through the entire manuscript. The authors themselves have, of course, used the manuscript to teach international finance at Berkeley and Princeton.
World Wide Web addresses as of August For us: hup:iwww. What are the long-term implications of sustained United States current account deficits and.
Japanese current account surpluses? How do government budget deficits affect in- terest rates, trade balances, and exchange rates? Is increasing global capital market integration affecting the nature and international propagation of business cycles, and how is it changing the susceptibility of economies to sudden shifts in investor sentiment?
How important is monetary policy, and what are the channels through which it affects the economy? These are issues that interest policymakers, business people, and researchers alike.
This book offers a framework and a general approach for thinking about inter- national macroeconomics. We believe the framework is valuable from both the theoretical and practical perspectives. Central to it is the role of international asset, markets in allowing countries to trade consumption goods over time by borrowing, from and lending to each other. This intertemporal approach certainly illuminates the economics of current account imbalances.
But it also discloses the intimate relationship between dynamic possibilities and international trade within periods. We do not pretend to have definitive answers to all the questions listed at the start of this introduction, but you should find the approach developed here useful for thinking about all of them. First, a brief road map of the topics and questions covered in the various chapters for more detail, see the table of contents. The models in Chapters 8 through 10 for the most part build closely on those of the preceding seven, but they bring money into the picture The first three chapters all assume one good on each date and view trade purely from an intertemporal perspective.
Chapter 1 covers the many basic insights that can be developed in a simple two-period model with a single asset. Chapter 2 looks at implications of deterministic and stochastic economies with infinitely-lived rep- resentative consumers. Richer demographic assumptions are introduced in Chap- ter 3, which explores various overlapping-generations models. Throughout the book we focus often—though far from exclusively—on the case of a small coun- try that takes the world interest rate and possibly other external prices as given by world markets.
As the body of international trade theory amply demonstrates, this can be a powerful and illuminating simplifying assumption, We nonetheless systematically study global equilibrium models as well, both to show how world prices are determined and to understand more completely the routes by which var- ious economic shocks are transmitted across national borders. In the fourth chapter, we introduce the possibility of several consumption goods on a given date, including nontraded goods one of which could be leisure and multiple tradable goods so that the static terms of trade play a role.
As we see, the theory illuminates some important facets of the long-term evolution of economic struc- ture. We conclude Chapter 4 by studying the terms of trade within an intertemporal Ricardian model in which nontradability is determined endogenously by interna- tional transport costs. Chapter 5 looks at the economic role of trade in risky assets, showing how models with uncertainty can be understood in terms of the fundamental principles covered in the previous four chapters.
The chapter illustrates how international fi- nancial markets may dramatically affect the dynamics of the current account and the international transmission of business cycles. It also covers the essentials of international portfolio diversification and the empirical puzzles surrounding ob- served diversification patterns. One vital application of the models of this section is to international asset pricing, which we explore in depth. International debt problems are frequently at the center of policy concerns.
Chapter 6 shows how they can arise when there is sovereign risk. The chapter also looks at other realistic departures from the idealized complete markets world of Chapter 5, notably models where asymmetric information is the central distortion. The results of this chapter throw light both on the degree to which the international capital market can perform its potential role and on the nature of the instruments, that will be traded.
A revival of economic growth theory has been one of the major developments in macroeconomics over the past decade. Chapter 7 surveys this literature, As is appropriate for a book focusing on international macroeconomics, however, we place a relatively heavy stress on open-economy issues and intercountry compar- isons, Thus we highlight the role of cross-border capital mobility in economic convergence, the interplay between capital flows and market imperfections, and the growth effects of international diversification under uncertainty.
In an earlier era, the function of money in trade and capital movements was considered the defining characteristic of international finance as a field as opposed o now, when nonmonetary aspects of international exchange are viewed as at Jeast as important for understanding macro issues.
The chapter which can be read before the first seven highlights such classic or soon-to-be-classic subjects as seignorage, endogenous price-level instability, speculative exchange rate crises, target zones for exchange rates, and the pricing of risky nominal assets.
Chapter 9 introduces sticky-price monetary models, with an emphasis on empiri- cal stylized facts and the workhorse Keynesian models. The chapter concludes with one of the most fruitful applications of the simple Keynesian framework, the strategic analysis of credibility in monetary policy. Chapter 10 is our attempt to provide a dynamic sticky-price model that preserves, the empirical wisdom embodied in the older Keynesian tradition without sacrific- ing the theoretical insights of modern dynamic macroeconomics.
Ata positive rate of interest r, nobody would want to store output in any case. In section 1. You should understand that in a nonstochastic environment, these expectations are held with subjective certainty. Only when there is real uncertainty, asin later chapters, are expected valUes averages over nondegenerate probability distribution.
Foundations of International Macroeconomics
Foundations of international macroeconomics
Obstfeld & Rogoff - Foundations of International Macroeconomics
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