This is a class in international and open-macro macroeconomics. It is divided in two parts. The first part is devoted to the international business cycle. The second part to monetary transmission and policy analysis.

Part I International business cycle

I.1 The international transmission mechanism

Lecture notes: analytical model

Lecture notes: quantitative analysis

The ABC of the international transmission in a stylized two-goods, two-country model. We use a simple model to map key issues in the literature.

Homework: derive the model in the lecture under CM and FA (if your want the version with Nontraded goods suggested as HW at the end of the lecture). You have also the codes to generate the graphs in the lecture.

** Section 2 of Corsetti, Giancarlo, Luca Dedola and Sylvain Leduc "International Risk Sharing and the Transmission of Productivity Shocks", Review of Economic Studies 2008
Cole H. and M. Obstfeld, "Commodity Trade and International Risk Sharing: How much do financial markets matter?" JME 1991, 28: 3-24
Basics on current account read OR chapter 1; Complete markets: Chapter 5 of OR pages 269-300.

I.2 International Real Business Cycle

A guided tour of seminal papers: one good world model, BKK, ST and recent developments. There are 4 papers to read.

Single good model
Slides from Morten on single-good model
Baxter analysis of complete versus incomplete allocation
Backus, D.K., P.J. Kehoe (1992), "International Evidence on the Historical Evidence of Business Cycles", American Economic Review, 82 (4), 864-888
** Backus, D.K., P.J. Kehoe (1992), "International Real Business Cycles", Journal of Political Economy, 100 (4), 755-775
Backus, D.K., P.J. Kehoe and F.E. Kydland, (1993), "International Business Cycles: Theory vs. Evidence", Quarterly Review, Federal Reserve Bank of Minneapolis. ** Baxter, M, (1995). International Trade and Business Cycles. In: Gene Grossman and Kenneth Rogoff (eds.), Handbook of International Economics, vol.3, North Holland, 1995.
Baxter, M., and M.J. Crucini, (1993). Explaining Saving-Investment Correlations. American Economic Review, 83, 416-36.

BKK
Slides from Morten on BKK model and related literature
** Backus, D.K., P.J. Kehoe and F.E. Kydland, (1994), `Dynamics of the Trade Balance and the Terms of Trade: the J-curve ", American Economic Review.
* Heathcote, J. and F. Perri, (2002), "Financial Autarky and International Business Cycles", Journal of Monetary Economics.
Kehoe, Patrick, and Fabrizio Perri (2003), "International Business Cycles with Incomplete Markets", Econometrica.

Stockman-Tesar
** Stockman A.C. and L. Tesar TOCKMAN, (1995), “Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements”, American Economic Review, 83, 473–486.

The Backus Smith puzzle
** 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
Kollmann, R., 1995. Consumption, real exchange rates and the structure of international asset markets. Journal of International Money and Finance, Vol. 14, n. 2.
Ravn, M. (2001), “Consumption Dynamics and Real Exchange Rates” (Mimeo, London Business School).
Obstfeld, M, and K Rogoff, 2001, "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?", NBER Macroeconomics Annual, Volume 15, 341-390

Recent development
** Corsetti, G., L. Dedola and S. Leduc "International Risk Sharing and the Transmission of Productivity Shocks", Review of Economic Studies 2008

Relevant reading
Ravn, MO., 1997, "International Business Cycles in Theory and in Practise", Journal of International Money and Finance, 16(2), 255-83.
Ravn, MO, and E. Mazzenga, 2004, "International Business Cycles: The Quantitative Role of Transportation Costs", Journal of International Money and Finance.
* Schmitt-Grohe, Stephanie, and Martin Uribe, 2003, "Closing Small Open Economy Models", Journal of International Economics 61, 163-85

I. 3 Evidence

Structural analysis of productivity and demand shocks in the traded-good sector based on CDL 2009 *** below

I. The international transmission of shocks

Corsetti Dedola and Leduc: Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism Among G7 Countries, NBER International Seminar on Macroeconomics, ISOM 2006.
*** Corsetti Dedola and Leduc: The International Dimension of Productivity and Demand Shocks in the US Economy, new version April 2009 (also CEPR dp 70003, October 2008)

II. International consumption risk sharing

Asdrubali, P., Sorensen, B. and O. Yosha, 1996. Channels of Interstate Risk Sharing: United States 1963-1990. The Quarterly Journal of Economics, Vol. 111.
Obstfeld, M., 1994. Are industrial country consumption risks globally diversified? In: Leidermann, L., Razin, A. (eds), Capital Mobility: The Impact on Consumption, Investment, and Growth. Cambridge, University Press.
Sorensen, B., and O. Yosha, 1998. International Risk Sharing and European Monetary Unification. Journal of International Economics, Vol. 45.

II. Portfolio diversification in general equilibrium

Lecture notes: portfolio and DSGE models

For an introduction to international finance, see Chapter 5 of the Obtfeld and Rogoff book, and my lecture notes Svensson-model
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"

III. Monetary transmission and optimal policy

A review of the basics: the baseline New-Keynesian model in closed economy: the NK model & NK model properties & Optimal policy

These part of the class basically follows a standard exposition of the NK model, as in Gali's book.

To learn more, a part for Mike Woodford book, you may want to read
Benigno P. and M. Woodford “Linear-Quadratic Approximation of Optimal Policy Problems,” revised August 2008, a technical guide to the method
Woodford M. Optimal Monetary Stabilization Policy,” February 2010. To appear in B.M. Friedman and M. Woodford, eds., Handbook of Monetary Economics, vol. 3 (forthcoming, Elsevier). provides a useful survey of recent developments

The New Open Economy Macroeconomic (NOEM) model: New-Keynesian model in open economy.

The workhorse model: natural and efficient allocation; the Phillips curve

The classical view: Divine coincidence in the baseline open economy model with complete markets and : Producer Currency Pricing (PCP)

The debate on exchange rates and relative price adjustment: Complete markets and Local Currency Pricing (LCP)

Strategic manipulation of the terms of trade: A Nash equilibrium with complete markets and PCP

Optimal policy when markets are incomplete

On fiscal-monetary interaction

This section reviews policy trade-offs and optimal policy in 5 economies: complete markets (CM) and PCP; CM and LCP; CM and Nash; Incomplete market (IM) and PCP; IM and LCP.

Benigno G and P Benigno, Designing targeting rules for international monetary policy cooperation, Journal of Monetary Economics 2006, 473-506
Clarida R., J. Gali and M. Gertler. A simple framework for international monetary analysis, Journal of Monetary Economics 2002, 879-904
***Corsetti G, L. Dedola and S. Leduc, Optimal monetary policy in open economies, prepared for Feldstein and Woodford, Handbook of Monetary Economics III
***Corsetti G, L. Dedola and S. Leduc, Demand Imbalances, Exchange Rate Misalignment and Monetary Policy, mimeo 2010
Engel C. “Currency Misalignments and Optimal Monetary Policy: A Reexamination,” revision March 10, 2010 (1st version: November 6, 2008)
De Paoli "Monetary Policy and Welfare in a Small Open Economy": CEP London 2007

Literature based on one-period preset prices

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 Dedola and Leduc: Optimal monetary policy and the sources of local-currency price stability, NBER wp 13544.
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.
Sutherland International Monetary Policy Coordination and Financial Market Integration CEPR Discussion Paper No 4251, January 2004
Benigno's “Price Stability in Open Economies,” Review of Economic Studies, Vol. 70(4) No. 245, Pages 743-764, (2003).
De Paoli "Monetary Policy and Welfare in a Small Open Economy": CEP London 2007
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

For your info: Lecture notes on the Mundell-Fleming model by Pesenti and Corsetti

Fiscal and monetary policy interactions

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

Part III. Exchange rate volatility and price stability

Local-currency price stability of imports

** Corsetti G. and L. Dedola Macroeconomics of International Price Discrimination. JIE
Ariel Burstein,Martin Eichenbaum and Sergio Rebelo 2005 Large Devaluations and the Real Exchange Rate, Journal of Political Economy, 2005.
Corsetti G., L. Dedola and S. Leduc 2009 High exchange rate volatility and low pass-through, JME
Bacchetta P. and E. Van Wincoop A Theory of the Currency Denomination of International Trade Journal of International Economics Engel Devereux and Storgaard Endogenous Exchange Rate Pass-Through when Nominal Prices are Set in Advance, Journal of International Economics

PPP and deviations from the law of one price: evidence

Background reading: * Rogoff K. The Purchasing Power Parity Puzzle, Journal of Economic Literature 1996

What drives local currency price stability?

Relative price of tradables (deviations from the law of one price plus terms of trade)?
Engel, Charles [1999]. "Accounting for US Real Exchange Rate Changes,'' Journal of Political Economy 107, 507-38.
Engels C. and J. Rogers."How wide is the border", American Economic Review 1996, 86:1112-1125.
Ariel Burstein, Martin Eichenbaum and Sergio Rebelo 2005 The Importance of Nontradable Goods' Prices in Cyclical Real Exchange Rate Fluctuations

(a) Aggregation bias in classical tests of PPP : Jean Imbs, Haroon Mumtaz Helene Rey, Morten Ravn "PPP Strikes Back: Aggregation and the Real Exchange Rate" Aggregating prices with different half-life induce an upward bias in estimating half-life: the sum of a stationary process and a non-stationary process is a non-stationary process. This paper has generated a debate. Get a summary. Also, "Aggregation Bias" DOES Explain the PPP Puzzle: contains the answer by the four authors above to Engel's criticisms.

(b) Tests allowing for costs of arbitrage: Maurice Obstfeld, Alan M. Taylor -- "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited" NBER Working Paper No. W6053 Issued in June 1997 See also O’Connell, P, 1998, “The Overvaluation of Purchasing Power Parity, Journal of International Economics, 44, February, 1-19.

Other stuff:

In class we discussed Meese and Rogoff puzzle Reprinted from Journal of International Economics 14 (1983), 3-24, Richard Meese and Kenneth Rogoff, "Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?". Check “The Continuing Puzzle of Short-Horizon Exchange Rate Forecasting,” (by Kenneth Rogoff and Vania Stavrakeva), Harvard University, May 2, 2008. and ‘Exchange Rate Models Are Not as Bad as You Think’:  A comment,” forthcoming in Kenneth Rogoff and Michael Woodford (eds.), NBER Macroeconomics Annual 2007, Cambridge, MA: MIT Press for the National Bureau of Economic Research, 2008.