International money and finance

INTERNATIONAL MONEY AND FINANCE 2nd edition

CONTENTS

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1 INTRODUCTION 1.1 The internationalization of finance 1.2 The chapters

2 Some Basic Concepts in International Finance 2.1 The exchange rate Spot and forward rates Foreign currency futures and options 2.2 The balance of payments accounts The balance of payments and the money supply 2.3 Purchasing power parity The real exchange rate 2.4 Floating exchange rates: prospect and retrospect 2.5 Exchange rate volatility

3 Spot and Forward Exchange Rates: Some more Basic Ideas Introduction 3.1 The elasticities view of the exchange rate Unstable exchange rates Marshall-Lerner condition The 'J' curve Devaluation and the terms of trade 3.2 The forward exchange rate, arbitrage and pure speculation Determination of the forward exchange rate by arbitragers and speculators Risk premia Uncovered interest arbitrage Inter-temporal ppp 3.3 Covered interest rate parity - empirical evidence 3.4 Uncovered interest rate parity - empirical evidence 3.5 Real interest rate parity - empirical evidence

4 Income and the Balance of Payments 4.1 The foreign trade multiplier 4.2 An early view of economic management: the Swan diagram 4.3 The assignment problem 4.4 The absorption approach Some policy considerations 4.5 Twin deficits 4.6 Foreign repercussions Effect of an autonomous increase in US expenditure Autonomous switch in US expenditure toward Japanese exports 4.7 Cooperative and 'locomotive' expansion to end a world recession

5 Macroeconomics in an Open Economy 5.1 The 'base-line' Mundell-Fleming model The principle of effective market classification and the assignment problem 5.2 The large country case 5.3 Insulation and the MF model 5.4 Imperfect capital mobility and the MF model 5.5 Regressive expectations and monetary-fiscal policy 5.6 The J curve effect and regressive expectations 5.7 Wealth effects 5.8 Aggregate suplly, the real balance effect on the exchange rate in the MF model Summary and conclusions

6 International Policy Coordination Introduction 6.1 The two country Mundell-Fleming model and macroeconomic independence Floating exchange rates (i) Monetary, or beggar-thy-neighbour, policy (ii) Fiscal policy
Fixed exchange rates (i) monetary policy (ii) fiscal policy Imperfect capital mobility Further extensions to the two country model of inter-dependence: the McKibben-Sachs model 6.2 The potential gains from policy coordination The prisoner's dilemma The Hamada diagram - targets and instruments revisted 6.3 Dynamic games, and the sustainability and reputation credibility of international cooperation 6.4 Some evidence on the potential benefits of coordination 6.5 Potential impediments to policy coordination and the appropriate form of such coordination

7 Purchasing Power Parity: Theory and Evidence Introduction 7.1 The absolute and relative purchasing power parity concepts Law of one price Absolute ppp Relative ppp 7.2 The efficient markets view of purchasing power parity 7.3 Further interpretation of purchasing power parity 7.4 Some further criticisms of purchasing power parity Other criticisms (1) Biased productivity: the Balassa-Samuelson thesis (2) The demand side and non-traded goods 7.5 The empirical validity of purchasing power parity A comparison of real and nominal exchange rates and tests of the law of one price *Regression Based Tests of ppp and the time series properties of the real exchange rate Concluding comments

8 Monetary Approach to the Balance of Payments Introduction 8.1 What is so different about the monetary approach? Different analytical approaches compared 8.2 The global monetarist model Short-run dynamics Devaluation Small country assumption Domestic credit expansion Distribution of the world's money supply The policy implications of the MABP *8.3 Sterilization and the Reserve Offset Coefficient Empirical framework Empirical results Problems with the empirical implementation of the MABP reduced form equations 8.4 The international transmission of inflation: some evidence

9 The Monetary View of Exchange Rate Determination Introduction 9.1 The asset approach to the exchange rate 9.2 The flex-price monetary approach to the exchange rate 9.3 Introducing expectations 9.4 Rational speculative bubbles 9.5 The sticky-price monetary approach 9.6 Currency substitution Currency substitution and the monetary approach Currency substitution and monetary targeting Currency substitution and inflation: the McKinnon hypothesis

*9.7 Empirical evidence on the monetary model
*9.8 More empirical evidence
*9.10 Empirical tests for the existence of speculative bubbles
Concluding comments

10 The Portfolio Balance Approach to the Determination of the Exchange Rate Introduction Wither the current account? 10.1 The portfolio balance model 10.2 Open market purchase of bonds: monetary policy Impact period The short-run adjustment period and the move to the new long-run equilibrium 10.3 An increase in the supply of domestic bonds: fiscal policy 10.4 Asset preference shift *10.5 Econometric evidence on the portfolio balance approach 10.6 Summary and concluding comments

11 Spot and Forward Exchange Rates and the Efficient Markets Hypothesis Introduction 11.1 Spot and forward exchange rates 11.2 The efficient markets hypothesis and the forward market for foreign exchange Some basic relationships *11.3 Econometric estimation of the EMH *Tests of the forward premium as an optimal predictor of the forward exchange rate *11.4 A risk premium story to explain why . may not by unity A model of the risk premium *11.5 Empirically implementing equation 9.24 i) the CAPM/latent variables approach ii) testing the othogonality condition directly iii) ARCH models of the risk premium The portfolio balance mean variabce approach to risk
Miscellaneous risk models Concluding comments

12 Expectational Explanations for the Rejection of the Efficient Markets Hypothesis and the 'News" 12.1 Introduciton 12.2 Peso effects, rational speculative bubbles and econometric inference 12.3 Technical analysis and chartism Deterministic chaos *12.4 Survey data, expectations and risk 12.5 The news approach to exchange rate modelling *12.6 Empirical studies of the news approach 12.7 The noise-trader paradigm

13 Historical Review of International Monetary Arrangementsœ Introduction 13.1 The international gold standard Increase in the home country's gold stock Rise in the price of gold Capital flows Some other adjustment mechanisms under the gold standard Anchoring the price level 13.2 The Bretton Woods system to 1971 Role of the IMF in the early days Heyday of the Bretton Woods system The IMF from 1970 Failure of the 'grand design' (1972©74) 13.3 The dollar standard Early views on the dollar standard Another view of the dollar standard Reserve creation and the US and world price levels The dollar standard 'on the booze' 13.4 The dollar sandard in an era of volatile exchange rate expectations Policy implications

14 The European Monetary System and Monetary Union Introduction 14.1 Benefits and costs of a currency area Benefits of a common currency Costs of a common currency 14.2 Origins of the EMS Operational details 14.3 How successful has the EMS been been? 14.4 The Delors Committee report on monetary union Questions of the transition 14.5 Target zones Target zones - evidence Target zones - a modification and some further evidence 14.6 Fiscal federalism 14.7 More on fiscal policy in a monetary union Autonomy Loss of the fiscal instrument? Discipline Coordination

15 International Money and Capital Flows 15.1 International money and capital flows 15.2 Eurobanking Origin of the eurodollar market The eurodollar credit multiplier Eurobanks as a debt management system The private ECU as a eurocurrency Regulation: the Basle Accord 15.3 International bond markets Growth of international bond markets ECU bonds 15.4 Direct foreign investment

16 Developing Countries, Balance of Payments Adjustment and the IMF Introduction 16.1 Developing Country exchange rate arrangements 16.2 The IMF: its role 16.3 The IMF's monetary approach to the balance of payments 16.4 New structuralist arguments against IMF adjustment policies New structuralists versus the IMF: devaluation Empirical evidence Adjustment and income distribution

17 The Order of Liberalization in Developing Countries Introduction 17.1 Distortions and economic performance 17.2 Unhappy experience with financial liberalization 17.3 The order of liberalization

18 The Formerly Centrally Planned Economies and the International Financial Economy 18.1 Introduction 18.2 Economic reform and the move currency convertibility 18.3 Catch©up scenarios and capital flows
Capital flows to FCPEs and developing countries 18.4 Effect on the world economy 18.5 Exchange rates 18.6 Dismantling the rouble zone 18.7 The order of liberalization in the FCPE Second best policies

19 International Debt Introduction 19.1 The debt problem 19.2 Growth of international debt The debt service ratio 19.3 Debt and economic growth Debt overhang 19.4 Capital flight 19.5 Governmental and national foreign indebtedness 19.6 The lenders' trap 19.7 Some debt-reform proposals The free-rider issue 19.8 An international debt facility

20 International Monetary Reform Introduction 20.1 Financing or adjustment? Choosing an international monetary system 20.2 Designing an international monetary system More on exchange rates and consistency 20.3 The costs and benefits of flexible exchange rates 20.4 Alternative plans for the reform of the IMS The McKinnon plan The extended target zone proposal

Bibliography Index