This is series of six lecture in international macroeconomics, focusing on the international transmission mechanism. The lectures combine current relevant policy issues with long-standing questions about macroeconomic interdependence. The main goals is to learn about recent development in the field, and identify possible directions to develop policy-friendly general equilibrium models of the international economy. There will be a few core reading each day, denoted with a star in the reading list to follow.

The first provides an analytical approach to the core transmission mechanism in general equilibrium, providing a guide to understand the performance of large DSGE models used by researchers and policymakers. The second lecture provides time-series evidence on the transmission mechanism of productivity shocks.

The third lecture moves on portfolio models in open economy (general equilibrium).

The forth and fifth lectures addresses issues in monetary transmission and policy design in open economy.

The sixth lecture analyzes international dimensions of fiscal policies.

Lectures and suggested homework may/may not be posted during the lecture period.

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Lecture 1 and 2. International transmission mechanism: core analytical and empirical issues

Lecture notes: analytical model

Lecture notes: quantitative model

Lecture notes: some evidence

1. The ABC of the international transmission in a stylized two-goods, two-country model

• Complete markets: terms of trade spillovers are positive
• Incomplete markets: wealth effects, relative demand and international price adjustment under financial autarky
• A generalization to bond-only economies: shock persistence and trade elasticities.
• * Section 2 of Corsetti, Giancarlo, Luca Dedola and Sylvain Leduc "International Risk Sharing and the Transmission of Productivity Shocks", mimeo. (new version 2006, section 2).

2. A look at the data: consumption risk sharing and the international transmission of productivity shocks in G7 countries

• * Corsetti Dedola and Leduc: Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism Among G7 Countries

Important references:

• Baxter Marianne 1995, International trade and business cycle", in Gene Grossman and Ken Rogoff (eds) Handbook of International Economics, North Holland
• Obsteld M. and K. Rogoff,  The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?, NBER macro annual 2000
• Backus, David K., and Gregor W. Smith, [1993]. ``Consumption and Real Exchange Rates in Dynamic Economies with Non-traded Goods,'' Journal of International Economics 35, 297-316
• V. V. Chari, Patrick J. Kehoe, and Ellen R. McGrattan (CKM) Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?

Lecture 3. Consumption risk insurance and portfolio diversification

Lecture notes: portfolio and efficient risk sharing

Lecture notes: portfolio and DSGE models

• Cole and Obstfeld economies and portfolio diversification
• Portfolio diversification in open economies: recent results.
• Obtfeld and Rogoff book, Chapter 5
• Cole H. and M. Obstfeld, "Commodity Trade and International Risk Sharing: How much do financial markets matter?" JME 1991, 28: 3-24
• Corsetti and Pesenti "Welfare and Macroeconomic Interdependence" QJE 2001
• * Heatcote and Perri 2004, The International Diversification Puzzle is not as bad as you think
• * Devereux Michael B and Alan Sutherland "Solving for Country Portfolios in Open Economy Macro Models"
• * Obstfeld's Ohlin Lecture: International Risk Sharing and the Cost of Trade

Lecture 4. Monetary transmission

Lecture notes

• The simple analytics of the international transmission of productivity and monetary shocks with nominal rigidities
• Debates on the role of exchange rates and relative price adjustment
• Stabilization in open economies: Is there an international dimension of stabilization policy? Are there gains from International policy co-ordination?
• Optimal export pricing with nominal rigidities (endogenous exchange rate pass-through)  
  • * Corsetti and Pesenti International Dimensions of Optimal Monetary Policy Journal of Monetary Economics, 52/2 pp 281-305
  • * Corsetti and Pesenti The simple geometry of transmission and stabilization in closed and open economy, February 2005
  • Corsetti Openness and the case for flexible exchange rates Research and Economics.
  • For your info: Lecture notes on the Mundell-Fleming model by Pesenti and Corsetti
  • Devereux and Engel "Monetary Policy in the Open Economy Revisited: Exchange Rate Flexibility and Price Setting Behavior," and Appendix (with Michael B. ), Review of Economic Studies 70, October 2003, 765-783.
  • Engel "Expenditure Switching and Exchange Rate Policy," NBER Macroeconomics Annual 2002, no. 17, 231-272.
  • "Expenditure Switching vs. Real Exchange Rate Stabilization: Competing Objectives for Exchange Rate Policy" Devereux and Engel.
  • Obsteld M. and K. Rogoff, Global implication of Self-Oriented national monetary rules, QJE 2002
  • Obsteld M. and K. Rogoff, New Directions for Stochastic Open Economy Models Maurice JIE 2001

Lecture 5. Exchange rate volatility and price stability.

Lecture notes

• Real and monetary determinants of pass-through
• Fundamental models of exchange rate volatility
• A theoretical perspectives on empirical models of pass-through

• Bacchetta and an Wincoop A Theory of the Currency Denomination of International Trade Journal of International Economics
• Backus, David K., Patrick J. Kehoe, and Finn E. Kydland [1995]. "International Business Cycles: Theory and Evidence," in Thomas F. Cooley (ed.) Frontiers of Business Cycle Research, Princeton University Press, Princeton, 331-56.
• * Corsetti Dedola and Leduc DSGE models with high exchange rate volatility and low pass-through, with Luca Dedola and Sylvain Leduc, REVISED MARCH 2006. International Finance Discussion Papers of the Federal Reserve Board, no. 845; CEPR dp 5377
• CKM
• Corsetti and Pesenti, "Endogenous Pass-through and Optimal Monetary Policy: A Model of Self-validating Exchange Rate Regimes", mimeo
• * Corsetti and Dedola Macroeconomics of International Price Discrimination. Old version with longer discussion of multiple equilibrium
• Engel Devereux and Storgaard Endogenous Exchange Rate Pass-Through when Nominal Prices are Set in Advance, Journal of International Economics

Lecture 6. International transmission of fiscal policy

Lecture notes

• An analytical inspection of different transmission channels
• Crowding out in open economies: theory and some empirical evidence
• The debates on the consumption multiplier
  • Corsetti and Mueller Twin Deficits: Squaring Theory, Evidence and Common Sense, prepared for Economic Policy. This version: March 15.
  • Monacelli Perotti Fiscal Policy, Trade Balance and the Real Exchange, Rate: Implications for International Risk Sharing, mimeo 2006
    
  • Kim and Roubini Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate