Welcome to Econ 442: Economics of

International Finance and Policy

About the course
• Instructor: Ray Miller
• ray.miller@colostate.edu
• Office hours before or after class
Broad Course Objectives
Upon completion of the course, you should:
• be familiar with the logic of a country’s balance of payments
• be familiar with the different approaches to exchange rate
determination in the short run and the long run
• understand the adjustments of macroeconomic aggregates in an open
economy in the short run and the long run
• be familiar with the broad history of the development of international
monetary arrangements and institutions
• be able to discuss some of the contemporary policy debates in
international economics
How to succeed in this course

• Read the book before class

• Take notes during lecture
• Participate and ask questions
in class
• Study with a partner or group
• READ THE BOOK
Trade (% of GDP)
70

60

50

40

30

20

10

United States World

Trade (% of GDP)
250

200

150

100

50

Australia China Germany Malawi United States Vietnam World

Some motivating questions…
1. Why do countries trade? (International Trade course)
2. How do countries pay for imports?
3. Is balanced trade the norm? Should it be?
4. What happens if imports are greater than exports?
 Billions

-800
-600
-400
-200
200
400
600

-1000
0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972

Australia
1973
1974
1975
1976
1977
1978

China
1979
1980
1981
1982
1983
1984
1985

Germany
1986
1987
1988
1989
1990
1991

Malawi
1992
1993
1994
1995
1996
1997
1998
1999

United States
2000
2001
2002
2003
2004
2005
2006
Vietnam

2007
2008
2009
2010
2011
Current Account Balance (Billions USD)

2012
2013
2014
2015
2016
2017
2018
2019
 -8
-6
-4
-2
0
2
4
6
8

-10
10
12
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984

Australia
1985
1986
1987
1988
1989

China
1990
1991
1992
1993
1994
1995
1996
1997

United States
1998
1999
2000
2001
2002
2003
2004
2005
2006
Current Account Balance (% GDP)

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 -5
0
5

-15
-10
10
15
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983

China
1984
1985
1986
1987
1988
1989
1990
1991

United States
1992
1993
1994
1995
1996
1997

Vietnam
1998
1999
2000
2001
2002
2003
2004
2005
2006
Current Account Balance (% GDP)

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 -5
0
5

-30
-25
-20
-15
-10
10
15
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974

Australia
1975
1976
1977
1978
1979

China
1980
1981
1982
1983
1984
1985
1986

Germany
1987
1988
1989
1990
1991
1992

Malawi
1993
1994
1995
1996
1997
1998
1999
2000
2001

United States
2002
2003
2004
2005
2006
Current Account Balance (% GDP)

2007
Vietnam

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
International Transactions
1. Need to settle accounts
2. International money
– Gold
– US dollar, euro, Japanese yen, UK pound
– Government bonds
3. Method to finance deficits
– Running down reserves
– Running up debt
4. Implications
Central Government Debt (% GDP)
120

100

80

60

40

20

Australia United States

 0
5
10
15
20
25
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
External Debt (% GNI)

1995

China
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 100
150
200
250
300
350
400
450

0
50
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

China
1991
1992
1993
1994
External Debt (% GNI)

1995

Malawi
1996
1997
1998
1999
2000

Vietnam
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 Billions

0
10
20
30
40
50
1960 60
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986

Malawi
1987
1988
1989
1990
1991
1992
1993

Vietnam
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Reserves (includes gold, Billions USD)

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 100Bn
200Bn
300Bn
400Bn
500Bn
600Bn
700Bn

Bn
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976

Australia
1977
1978
1979
1980
1981
1982
1983

Germany
1984
1985
1986
1987
1988
1989

Malawi
1990
1991
1992
1993
1994
1995
1996
1997
1998

United States
1999
2000
2001
2002
2003
2004
Vietnam

2005
2006
2007
2008
2009
Reserves (includes gold, Billions USD)

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 500Bn

Bn
1000Bn
1500Bn
2000Bn
2500Bn
3000Bn
3500Bn
4000Bn
1960 4500Bn
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972

Australia
1973
1974
1975
1976
1977
1978

China
1979
1980
1981
1982
1983
1984
1985

Germany
1986
1987
1988
1989
1990
1991

Malawi
1992
1993
1994
1995
1996
1997
1998
1999
2000
United States 2001
2002
2003
2004
2005
2006
2007
Vietnam

2008
2009
Reserves (includes gold, Billions USD)

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 0
1
2
3
4
5
6
7
8
9
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

United States
1998
1999
2000
2001
2002
Reserves (% of external debt)

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 100
120

0
20
40
60
80
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

Malawi
1990
1991
1992
1993
1994
1995

Vietnam
1996
1997
1998
1999
2000
2001

United States
2002
Reserves (% of external debt)

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 100
200
300
400
500
600

0
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987

China
1988
1989
1990
1991
1992

Malawi
1993
1994
1995
1996
1997

Vietnam
1998
1999
2000
2001
2002
Reserves (% of external debt)

2003
2004

United States
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Importance of International Finance
• Facilitates international trade
• Effects income and employment
• Growth of international financial flows much beyond the
need of trade
• International capital market
– investment
– speculation
– crisis and default
• All tied to exchange rates
 10Bn
12Bn
14Bn
16Bn
18Bn

Bn

-2Bn
2Bn
4Bn
6Bn
8Bn
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992

Malawi
1993
1994
1995
1996
1997

Vietnam
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Foreign Direct Investment, inflows (USD)

2016
2017
2018
2019
 -100Bn
100Bn
200Bn
300Bn
400Bn
500Bn
600Bn

Bn
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980

Australia
1981
1982
1983
1984
1985

China
1986
1987
1988
1989
1990
1991

Germany
1992
1993
1994
1995
1996

Malawi
1997
1998
1999
2000
2001
2002
2003
United States 2004
2005
2006
2007
2008
2009
Vietnam

2010
2011
2012
2013
2014
2015
Foreign Direct Investment, inflows (USD)

2016
2017
2018
2019
 0
1
2
3
4
5
6
7
8
9
10
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985

Australia
1986
1987
1988
1989
1990

China
1991
1992
1993
1994
1995
1996
1997

Germany
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Official exchange rate (LCU per USD)

2011
2012
2013
2014
2015
2016
2017
2018
2019
 100
200
300
400
500
600
700
800

0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981

Australia
1982
1983
1984
1985
1986
1987

China
1988
1989
1990
1991
1992
1993
1994

Germany
1995
1996
1997
1998
1999

Malawi
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Official exchange rate (LCU per USD)

2011
2012
2013
2014
2015
2016
2017
2018
2019
 5000

0
10000
15000
20000
1960 25000
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

Australia
1978
1979
1980
1981
1982
1983

China
1984
1985
1986
1987
1988
1989
1990

Germany
1991
1992
1993
1994
1995
1996

Malawi
1997
1998
1999
2000
2001
2002
Vietnam

2003
2004
2005
2006
2007
2008
2009
2010
Official exchange rate (LCU per USD)

2011
2012
2013
2014
2015
2016
2017
2018
2019
 1E+09
2E+09
3E+09
4E+09
5E+09
6E+09
7E+09
8E+09

0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974

Australia
1975
1976
1977
1978
1979

China
1980
1981
1982
1983
1984
1985
1986

Germany
1987
1988
1989
1990
1991
1992

Malawi
1993
1994
1995
1996
1997
1998
1999

Vietnam
2000
2001
2002
2003
2004
2005
2006
Zimbabwe

2007
2008
2009
2010
Official exchange rate (LCU per USD)

2011
2012
2013
2014
2015
2016
2017
2018
2019
Argentina Crisis
Official exchange rate (LCU per USD)
30

25

20

15

10

Argentina
 50Bn
100Bn
150Bn
200Bn
250Bn
300Bn

Bn
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
Argentina Crisis

1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
External Debt (current USD)

2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Broad Course Structure
1. Introduction
2. Theory: Open Economy Macroeconomics
– Balance of Payments
– Exchange Rates
3. History and Policy
– History of International Monetary Systems
– International Capital Markets
– Currency Unions
– Developing Countries
– Current Issues and Policy
Remember, please:

• Read the syllabus and schedule

• Read Chapter 1 in the text