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M.I.T. Suggested Reading Syllabus

M.I.T. Open Economy Macroeconomics. Syllabus and bibliography. Dornbusch, 2000.

 

A genuine regret from my graduate school education was that I had not taken a course with Rudiger Dornbusch. Ex post it became clear that I would have been personally better served not having taken economic history at M.I.T. (all told, I had four semesters of solid economic history courses as an undergraduate at Yale), but unfortunately nobody shared with me the tip to take a trip on this rising star of open economy macroeconomics who began teaching at M.I.T. in 1975.

Rudi Dornbusch inspired many a classmate of mine at M.I.T. and I am sure many an economist beyond. (c.v. at M.I.T.)

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14. 582 — OPEN ECONOMY MACROECONOMICS

R. Dornbusch 
Spring 2000

COURSE OUTLINE:

I.    Some Monetary History

II.    The Basic Open Economy Model

Gold Standard and the Classical Open Economy 
The Dependent Economy Model

III.    Nominal Rigidities and Policy.

Money, Wages, and Employment. 
PPP and Real Exchange Rates 
Pricing in the Open Economy

IV.    Intertemporal Trade.

V.    Finance, Exchange Rates, and Macro Implications

Capital Mobility, Exchange Rates, and Employment. 
Portfolio Diversification and Risk Premia

VI.    Policy Issues

Target Zones 
Currency Boards 
Stabilization and Exchange Rate Management 
Global Capital Markets 
Feldstein-Horioka and Capital Mobility 
Balance of Payments Crises 
Vulnerability, Crises, and Contagion 
EMU and New International Financial Architecture

TEXTS AND SOURCES:

Required readings are denoted with two asterisks (**), recommended readings with one asterisk (*).

** Grossman, G. and K. Rogoff (eds.). Handbook of International Economics. Vol. III, North Holland, 1995.
** Obstfeld, M. and K. Rogoff. Foundations of International Macroeconomics, MIT Press, 1996
Obstfeld, M. and K. Rogoff. Foundations of International Macroeconomics Workbook, MIT Press, 1998.
* Dornbusch, R. Open Economy Macroeconomics, Basic Books, 1980.
* Dornbusch, R. Exchange Rates and Inflation, MIT Press, 1988.
** See also the IMF website (http://www.imf.org) or recent IMF research reports.

Several journals are available online through JSTOR, including The Journal of Money, Credit, and Banking, The Journal of Economic Perspectives, The Journal of Political Economy, The Quarterly Journal of Economics, and The American Economic Review. Please visit JSTOR’s main page if you experience difficulty connecting to any articles from these journals to determine whether you qualify to use their site.

I.  Some Monetary History.

  • Bordo, M. and Capie. Monetary Regimes in Transition. Cambridge University Press, 1994.
  • Bordo, M. and A.Schwartz (eds.). A Retrospective on the Classical Gold Standard 1821- 1931. University of Chicago Press and NBER, 1984.
  • Cassel, G.  Money and Foreign Exchange After 1914, Constable, 1922.
  • Eichengreen, B. (ed) The Gold Standard in Theory and History, Methenu, 1985, Chapter 1.
  • DeGrauwe, P. International Money Post War Trends and Theories. Clarendon Press 198x.
  • Friedman, M.  Money Mischief. Harcourt Brace Hovanovich, 1992.
  • Kindleberger C.  Manias, Panics and Crashes : A History of Financial Crises. Basic Books 1989.
  • Kindleberger C. A.  Financial History of Western Europe. Allen & Unwin 1984.
  • Obstfeld, M. and A.M. Taylor.  Global Capital Markets: Integration, Crises and Growth, unpublished manuscript.
  • Taussig, F.  International Trade, Macmillan,1928. Parts II and III.
  • Yeager, L.  International Monetary Relations, Harper & Row, 1966 Part II.

II. The Basic Open Economy Model.

Gold Standard and The Classical Open Economy

  • ** Calvo, G. “Devaluation: Level versus Rates” Journal of International Economics, Vol ll, No. 2, Pages 165-172, May 1981.
  • * Dornbusch, R. and Mussa, M. “Consumption, Real Balances and the Hoarding Function”, International Economic Review, June 1975. Also in Exchange Rates and Inflation, Chapter 18.
  • ** Dornbusch, R., S. Fischer and P. Samuelson.“Comparative Advantage, Trade and Payments in a Ricardian Model with a Continuum of Goods” American Economic Review Dec 1977. Also in Exchange Rates and Inflation, Chapter 14.
  • Dornbusch, R.  Open Economy Macroeconomics. Chapter 7.

The Dependent Economy Model

  • Calvo, G. and Rodriguez, C. “A Model of Exchange Rate Determination Under Currency Substitution and Rational Expectations”, Journal of Political Economy, No. 3, 1977, pgs 617-625.
  • * Dornbusch, R. “Real and Monetary Aspects of the Effects of Exchange Rate Changes” in Exchange Rates and Inflation, MIT Press 1988, Chapter 3.
  • * Dornbusch, R.  Open Economy Macroeconomics. Chapter 6.
  • ** Mundell, R. A. Monetary Theory, chapt. 10.
  • Salter,W. “Internal and External Balance” Economic Record, 1960.
  • Swan, T. “Economic Control in a Dependent Economy” Economic Record, 1960.

III. Nominal Rigidities and Policy.

Money, Wages and Employment

  • Brock, P. “Investment, the Current Account and the Relative price of Nontraded Goods in a Small Open Economy.” Journal of International Economics, May 1988.
  • ** Calvo, G. “Staggered Contracts and Exchange Rate Policy” in J.Frenkel (ed.) Exchange Rates and International Macroeconomics. University of Chicago Press and NBER, 1983.
  • ** Dornbusch, R.  Open Economy Macroeconomics, chapter 9.
  • * Dornbusch, R. “PPP Exchange Rate Rules and Macroeconomic Stability” In Exchange Rates and Inflation, Chapter 11.
  • Dornbusch, R. “Real Exchange Rates and Macroeconomics: A Selective Survey” Scandinavian Journal of Economics 91: (2), 1989.
  • Kouri, P. “Profitability and Growth in a Small Open Economy” in A. Lindbeck(ed.) Inflation and Employment in Open Economies, North Holland 1979.
  • * Krugman, P. and Taylor,L. “The Contractionary Effects of Devaluation”, Journal of International Economics, August 1978 pp. 445-456.
  • Lizondo, S. and P. Montiel. “Contractionary Devaluation in Developing Countries. An Analytical Survey.” International Monetary Fund Staff Papers, March 1989.
  • ** Obstfeld, M. and Rogoff, K. “Sticky-Price Models of Output, the Exchange Rate, and the Current Account” In Foundations of International Macroeconomics, Ch.9.
  • Rodriguez, C. “A Stylized Model of the Devaluation-Inflation Spiral.” International Monetary Fund Staff Papers, March 1978.
  • Dornbusch, R.  The Effectiveness of Exchange-Rate Changes, Oxford Review of Economic Policy, Vol. 12, No. 3. Pgs. 26-38.
  • ** Dornbusch, R. “The Latin Triangle“

PPP and Real Exchange Rates.

  • Keynes, J.M.  A Tract on Monetary Reform, MacMillan, 1923, chapt. 3.
  • Dornbusch, R. “Purchasing Power Parity” In Exchange Rates and Inflation,Chapter 5.
  • * Frankel, J. and A. Rose. “A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries”Journal of International Economics,40(1) 209-224, 1996.
  • Marston, R. “Real Exchange Rates and Productivity Growth in the United States and Japan” in S. Arndt and D. Richardson (eds.) Real-Financial Linkages Among Open Economies, Cambridge: MIT Press.
  • Obstfeld and Rogoff, K. “Perspectives on PPP and Long-Run Real Exchange Rates” chapter 32 in Grossman G. and K. Rogoff (eds.) Handbook of International Economics, Vol. III., North Holland, 1995. 

Pricing in the Open Economy.

  • Dornbusch, R. “Exchange Rates and Prices” American Economic Review, March 1987. Also in Exchange Rates and Inflation, Chapter 5.
  • ** Frankel, J. and A. Rose “Empirical Research on Nominal Exchange Rates.” chapter 33 in Grossman G. and K. Rogoff (eds.) Handbook of International Economics, Vol. III., North Holland, 1995.
  • * Goldberg P.K. and M. Knetter “Goods Prices and Exchange Rates: What have we learned?” Journal of Economics Literature, vol. XXXV, September 1997, pp.1243-1272.

IV. Intertemporal Models Of The Open Economy

  • Obstfeld, M. and Rogoff,K.  Foundations of International Macroeconomics, parts 1-4.
  • * Obstfeld, M. and Rogoff, K. “The Intertemporal Approach to the Current Account” chapter 34 in Grossman G. and K. Rogoff (eds.) Handbook of International Economics, Vol. III., North Holland, 1995.
  • Fisher, E. O’N and K. Kasa.  Generational Accounting in Open Economies in FRBSF Economic Review, 1997, Number 3.
  • * Dornbusch, R. “Real Interest Rates, Home Goods and Optimal External Borrowing, Journal of Political Economy, Feb 1983 (also in Exchange Rates and Inflation, Chapter 16.)
  • ** Dornbusch, R. “Notes  on Intertemporal Trade”.

V. Finance, Exchange Rates and Macro Implications 

Capital Mobility, Exchange Rates, and Employment.

  • * Dornbusch, R. “Expectations and Exchange Rate Dynamics”, Journal of Political Economy, Dec. 1976 (also in Exchange Rates and Inflation, chapter 4)
  • Frankel, J. and K. Froot. “Using Survey Data to Test Propositions Regarding Exchange Rate Expectations.” American Economic Review Vol. 77, 1987, pp. 133-153.
  • Frenkel, J. and Mussa, M. “Asset Markets, Exchange Rates and the Balance of Payments” in R. Jones and P. Kenen (eds.) Handbook of International Economics, Vol.2, North-Holland 1985.
  • * Krugman,P.  Exchange Rate Instability, MIT Press, 1988.
  • Taylor M. “The Economics of Exchange Rate”.Journal of Economic Literature, Vol.XXXIII, March 1995, pp.13-47.
  • Mundell, R.  International Economics, chapts. 14 -18.
  • De Long, J. Bradford, Shleifer A. , Summers L. , Vishny R.  “Noise Trader Risk in Financial Markets” Journal of Political Economy; V98 n.4 August 1990, pp. 703-38.
  • Frankel, Jeffrey A.; Galli, Giampaolo; Giovannini, Alberto, Editors.  “The Microstructure of Foreign Exchange Markets”.  National Bureau of Economic Research Conference Report Series. Chicago and London: University of Chicago Press, 1996.

Portfolio Diversification and Risk Premia.

  • * Dornbusch, R. “Exchange Rate Risk and the Macroeconomics of Exchange Rate Determination, in Exchange Rates and Inflation, Chapter 7.
  • Frankel, J. and Froot, K. “Forward Discount Bias: Is it an Exchange Risk Premium?”Quarterly Journal of Economics 104:1, 139-162.
  • ** Froot, K. and R. Thaler. “Anomalies: Foreign Exchange”,Journal of Economics Perspectives, vol 4, No. 3, Summer 1990, Pages l79-l92.
  • Krugman, P. “Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets.”NBER Working Paper No. 651, March 1981.
  • Mussa,M. “Official Intervention and Exchange Rate Dynamics” in J.Bhandari (ed.) Exchange Rate Management Under Uncertainty,MIT Press 1985.
  • Sachs, J. and Wyplosz, C. “Real Exchange Rate Effects of Fiscal Policy.” NBER Working PaperNo. 1256, Jan. 1984.
  • Neely, Christopher J. “Technical Analysis and the Profitability of U.S. Foreign Exchange Intervention”.  Federal Reserve Bank of St. Louis, July/August 1998.
  • Solnik, Bruno.  “Global Asset Management: Too Hedge or Not to Hedge–a Question That Cannot be Ignored”.  The Journal of Portfolio Management, Summer 1998.
  • Stein, Jerome L. and G. Paladino.  Recent Developments in International Finance: A Guide to Research Journal of Banking and Finance,21 (1998) 1685-1720.
  • Stulz, Rene M.  “International Portfolio Choice and Asset Pricing: An Integrative Survey”, in R. Jarrow et al (eds)Handbooks in OR & MS, vol. 9, Elsevier Science B.V., 1995.

VI. Policy Issues

Target Zones

  • Bertola, G. “Continuos-Time Models of Exchange Rates and Intervention ” In F. van der Ploeg, ed.Handbook of International Macroeconomics, Blackwell, 1994.
  • Bertola, G. and Caballero, R.“Target Zones and Realignments”, American Economic Review, 1992.
  • ** Krugman, P. and M. Miller. (eds.) Exchange Rate Targets and Currency Bands. Cambridge University Press, 1992.
  • ** Svensson, L. “An Interpretation of Recent Research on Exchange Rate Target Zones.”Journal of Economics Perspectives, Vol 6, No. 4, pp. 119-144, Fall 1992.
  • Werner, A. “Exchange Rates and Target Zone Width”. Economic Letters. Dec 1992.

Exchange Rate Regimes and Currency Boards

  • Calvo, G. “On Dollarization”,1999 (www.bsos.umd.edu.econ.calvo.htm)
  • Dornbusch R. and F. Giavazzi,“Hard Currency and Sound Credit: A Financial Agenda for Central Europe” May 1998.
  • Eichengreen, B.“The Choice of Exchanage Rate Regime” (incomplete).
  • Eichengreen, B.  Golden Fetters, Oxford University Press, 1992.
  • Friedman, M. “The Case for Flexible Exchange Rates” in his Essays in Positive Economics. U. of Chicago Press, 1953.
  • **Goldstein, M. Exchange Rate System and the IMF. Institute for International Economics, 1995
  • Hanke, S. and K. Schuler  Currency Boards for Developing Countries. ICS Press, 1994.
  • List of References to Currency Boards by C. Broda.
  • Mihalke D. “Currency Board Arrangements: Issues and Experiences”.International Monetary Fund Occasional Paper No. 151, 1997.
  • Mundell, R. “A Theory of Optimum Currency Areas”, American Economic Review 51, September 1961.
  • Obstfeld, M. and K. Rogoff, “The Mirage of Fixed Exchange Rates” Journal of Economic Perspectives 9, Fall 1995
  • Perry G. E. “Currency Boards and External Shocks: How Much Pain, How Much Gain?”, World Bank Latin American and Caribbean Studies, February 1997.
  • Taussig, F. International Trade, Macmillan, 1928.  Parts II and III.
  • Tornell, A. and A. Velasco, “Fixed vs. Flexible Exchange Rates: Which Provides More Fiscal Discipline?”NBER WP. No. 5108, 1995.
  • * Williamson, J. What Role for Currency Boards? Institute for International Economics, Washington D.C., Sep. 1995.
  • Ghosh, A., A. Gulde and H. Wolf.  “Currency Boards: The Ultimate Fix?” IMF, wp. 98/8
  • ** Williamson, J.  The Crawling Band as an Exchange Rate Regime: Lessons from Chile, Colombia and Israel, Institute of International Economics, 1996.

Stabilization and Exchange Rate Management

  • Alesina, A. and A. Drazen. “Why are Stabilizations Delayed?” American Economic Review, December 1991.
  • Bruno, M. et. al.  Lessons of Economic Stabilization and its Aftermath.MIT Press, 1991.
  • Calvo, G. “Incredible Reforms” in G.Calvo (ed.) Debt, Stabilization and Development. Oxford: Basil Blackwell, 1989.
  • Caballero, R. Structural Volatility In Modern Latin America, April, 2000
  • Calvo, G. and C. Vegh. “Credibility and the Dynamics of Stabilization Policy: A Basic Framework.” IMF, Staff Papers, November 1990.
  • * Dornbusch, R. “Credibility and Stabilization”, Quarterly Journal of Economics, August 1991, pp. 837-850. Also in R.Dornbusch Stabilization, Debt, and Reform, Prentice Hall 1993.
  • * “The New Classical Macroeconomics and Stabilization Policy.”American Economic Review, May 1990. Also in R. Dornbusch Stabilization, Debt, and Reform, Prentice Hall 1993.
  • Dornbusch, R., and S. Edwards, S (eds)The Macroeconomics of Populism in Latin America. University of Chicago Press, 1991.
  • Dornbusch, R. and Fischer, S. “Stopping Moderate Inflations.” World Bank Review, 1992.
  • Dornbusch, R., Goldfajn, I. and Valdes, R. “Currency Crisis and Collapses”, Brookings Papers, 2, 1995.
  • Drazen, A. and Helpman, E. “Stabilization With Exchange Rate Management” Quarterly Journal of Economics, 1987.
  • Fernandez, R. and D. Rodrik. “Resistance to Reform. Status Quo Bias in the Presence of Individual Specific Uncertainty” American Economic Review, December 1991.
  • Goldfajn I. and R. O. Valdes“The Aftermath of Appreciations”. NBER WP#5650, July 1996.
  • ** Vegh, C. “Stopping High Inflation: An Analytical Overview,” International Monetary Fund, Staff Papers, September 1992.
  • * Williamson, J. “The Crawling Band as an Exchange Rate Regime: Lessons from Chile, Colombia and Israel”, Institute of International Economics,1996.

Feldstein-Horioka and Long Term Capital Mobility.

  • Cardoso, E. and R. Dornbusch. “Foreign Private Capital Flows” Handbook of Development Economics, Vol II, North Holland, 1989.
  • **Dooley, M., J. Frankel and D. Mathieson “International Capital Mobility: What do Saving-Investment Correlations Tell US?” International Monetary Fund, Staff Papers, September 1987.
  • ** Feldstein, M. and Horioka, C. “Domestic Savings and International Capital Flows”. Economic Journal, June 1980, pages 314-329.
  • Frankel, J. “Measuring International Capital Mobility: A Review.”American Economic Review. Papers and Proceedings. May 1992.
  • Harberger, A.“Vignettes on the World Capital Market”, American Economic Review, May 1980.
  • ** Ventura, J. & A. Kraay, “Current Accounts in Debtor and Creditor Countries”, March 1999. ECONOMETRICS SEMINAR (Joint Harvard/MIT) 

Balance of Payments Crises.

  • Calvo, G. “Balance of Payments Crises in a Cash in Advance Economy”, Journal of Money, Credit and Banking,1987.
  • Dornbusch, R. “Collapsing Exchange Rate Regime”, Journal of Development Economics, Vol 27, No 1-2, Pgs 7l-83, October 1987.
  • Flood, R. and P.Garber, 1984, “Collapsing Exchange Rate Regimes: Some Linear Examples.” Journal of International Economics,1/2, 1-13.
  • Froot K and M. Obstfeld, “Exchange Rate Dynamics Under Stochastic Regime Shifts: A  Unified Approach”, NBER WPNo. 2835, February 1989.
  • ** Garber, P. and L. Svensson “The Operation and Collapse of Fixed Exchange Rate Regimes” chapter 36, section 3, in Grossman G. and K. Rogoff (eds.) Handbook of International Economics,Vol. III., North Holland, 1995.
  • ** Krugman, P. “A Model of Balance of Payments Crises.”Journal of Money, Credit and Banking, 3, 1979 ,311-325.
  • ** Salant,S. and D. Henderson, 1978,”Market Anticipations of Government Policies and the Price of Gold” Journal of Political Economy, 4, 627-648.

Crises and Contagion

  • Caballero, R. and Krishnamurthy, “Emerging Markets Crises: An Asset Market Perspective”, MIT mimeo, 1998.
  • Calvo, Guillermo A.”Capital FLows and Capital-Market Crises: The Simple Economics of Sudden Stops”, unpublished manuscript, U. of Maryland, 1998 (http://www.bsos.umd.edu/econ/ciecalvo.htm)
  • Calvo, Guillermo A. “Understanding the Russian Virus”, unpublished manuscript, U. of Maryland, 1998 (http://www.bsos.umd.edu/econ/calvo.htm)
  • Chang and Velasco, “Financial Crises in Emerging Markets: A Canonical Model” NBER WP No. 6469, 1997.
  • Diaz Alejandro, C. “Good-bye Financial Repression, Hello Financial Crisis” Journal of Development Economics, 19, 1985.
  • Dornbusch,R. “Asian Themes”, (http://web.mit.eud/rudi/www)  Feb. 1998.
  • Dornbusch,R. “Brazil’s Incomplete Stabilization and Reform”, Brookings Papers on Economic Activity 1:1997, pp.367-404 (http://web.mit.eud/rudi/www.)
  • Eichengreen B., A. Rose, C. Wyplosz. “Contagious Currency Crises”. Scandinavian Journal of Economics,December 1996.
  • Goldfajn, I. and Valdes, “Capital Flows and the Twin Crisis: The Role of Liquidity” IMF WP 97/87.
  • IMF, World Economic Outlook, Fall 1998 (http://www.imf.org)
  • IMF, International Capital Markets, Fall 1998 (http://www.imf.org)
  • *Kaminsky G. and C.Reinhart, “On Crises, Contagion and Confusion.” Unpublished manuscript, George Washington University and U. of Maryland, 1998.
  • Kaminsky, G. “Leading Indicators of Currency Crises” Board of Governors of the Federal Reserve, mimeo.  Board of Governors of the Federal Reserve, December, 1997.
  • Krugman P. “The Myth of Asia’s Miracle”. Foreign Affairs, November/December 1994.
  • Krugman P. “What happened to Asia?” January 1998 (http://web.mit.edu/krugman/www)
  • Obstfeld, M., “The Logic of Currency Crises”, Cahiers Economique and Monetaires, 43, 1995.
  • ** Tobin, J.  “A Proposal for International Monetary Reform” in his Essays in Economics, MIT Press, 1982, chapt. 20.

EMU and New International Financial Architecture

  • Dornbusch,R., C.Favero and F. Giavazzi “Challenges for the European Central Bank” Economic Policy, April 1998, pp. 15-64, CEPR (http://web.mit.edu/rudi/www).
  • Eichengreen, B. “Toward a New International Financial Architecture: A Practical Post-Asia Agende”, IIE Press, 1999.
  • Eichengreen, B.”European Monetary Unification: Theory, Practice, Analysis”, MIT Press, 1997.
  • Fischer, S. “Reforming the International Monetary System” David Finch lecture, November, 1998 (http://www.imf.org/external/np/speeches/1998/110998.HTM).
  • Fischer, S. “On the Need for an International Lender of Last Resort” New York, January 3, 1999.
  • McCaughley, “The Euro and the Dollar”, Princeton Essays in International Finance, 1997

Source: August 17, 2000 webpage capture by Internet Archive Wayback Machine.

Image Source: Rudiger Dornbusch from the website of the MIT Museum.