INTERNATIONAL FINANCE

ECON 356
University of British Columbia
Term 2, January 2005
Instructor : K. Gente

Course outline :
The course points out the necessity to consider economies as opened. It presents first the
reasons explaining flows of goods and flows of capital between countries. Second, it
focuses on the exchange rate, which appears as a key-variable revealing competitiveness.
Third, it stresses short -run macroeconomic equilibrium in an open economy explaining
the way monetary and fiscal policies work under fixed and floating exchange rates.
Finally, it reviews the main explanations of currency crises.
I.

International capital mobility

a. Why international capital flows?
i. Capital flows as a counterpart of the exchange of goods
ii. Capital flows to hedge risks
b. The reasons of exchange: some aspects of international trade and intertemporal
choice
i. Static analysis: international trade because of differences in productivity,
differences in factor s endowment
ii. Dynamic analysis: international trade as a way of saving because of
differences in time preference
c. Recent evolutions of financial integration
d. The balance of payments
Textbooks:
Mishkin, P art I.
Krugman and Obstfeld, Chapters 1, 2, 3, 4, and 7.

II.

The Exchange rate: a key variable

a. Some definitions of exchange rate
b. Exchange rates in the long-run: The Purchasing Power Parity (PPP) theory
c. Different exchange rate regimes
Textbooks:
Krugman and Obsfeld, Chapters 12-15.

III.
Consequences of financial integration on short-run macroeconomic equilibrium:
the Mundell-Fleming approach
a. The short-run equilibrium
b. Monetary and Fiscal Policies in case of flexible exchange rate
c. Monetary and Fiscal Policies in case of fixed exchange rate
Textbooks:
Mishkin, Part V.
Krugman and Obstfeld, Chapters 16, 17.
IV.

Currency crises

Krugman and Obstfeld, Chapter 20.

References:
- The Economics of Money, Banking and Financial Markets, 2nd Canadian Edition,
Mishkin.
- International Economics: Theory and Policy, 6th edition, Paul Krugman and Maurice
Obstfeld .
Some further readings:
- for introduction:
Macroeconomics, Fifth Edition, N. Gregory Mankiw (Harvard U.), chapter
5.