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«Lecturer: Richard Portes Secretary: Harvinder Saran P326 (x8425) hsaran Course code: E306 AUT11 Wednesday 1845-2130 Aims and objectives ...»

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GLOBAL CAPITAL MARKETS AND CURRENCIES

Lecturer: Richard Portes

Secretary: Harvinder Saran P326 (x8425)

hsaran@london.edu

Course code: E306 AUT11

Wednesday 1845-2130

Aims and objectives

This course deals with the international financial environment facing firms in a globalised

economy. It will provide tools for assessing the impact of economic policy shocks and

financial disturbances on financial markets, exchange rates, and capital flows. The course is suitable for anyone seeking the further understanding of the international macroeconomy, whose importance the current crisis has revealed. It will be especially relevant for careers in investment analysis, asset management, hedge funds, capital markets, corporate finance, and the finance/treasury function of corporates. There is little overlap with International Finance (E207) – GCMC gives the global macroeconomic context for international financing decisions.

The course will be taught by Richard Portes: http://faculty.london.edu/rportes/ Topics covered Exchange rates and the current account of the balance of payments • Real exchange rates and purchasing power parity • Nominal exchange rates, interest rates, and the carry trade • The dollar, the euro and the RMB in the long run • Financial globalisation • Currency and banking crises • Sovereign debt and default • Sovereign debt in 2011: US, UK, euro zone, emerging markets • International financial stability: the crisis of 2008-2009 • What to do, how to do it, what consequences?

• Format and teaching methods Teaching will be primarily in the form of lectures, with some distinguished visiting speakers (list to be posted on Portal). For each topic there will be a specific application of the tools discussed – e.g., is the US current account deficit sustainable? What determines emerging market spreads? Students will do group reports on these questions.

There will be no single set text – articles will be distributed in advance (in the course book), and there will be handouts for each session (all will be on Portal). But there will be some

citations from the following textbook:

P. Krugman and M. Obstfeld, International Economics: Theory and Policy ( Pearson / Addison Wesley,7th ed., 2006), Chs. 12-21. A basic text. Abbreviated KO. See http://www.amazon.co.uk/gp/offer-listing/032131154X/sr=8- 2/qid=1220829787/ref=olp_pg_new?ie=UTF8&coliid=&startIndex=0&me=&qid=1220829787& sr=8-2&seller=&colid=&condition=new An excellent source for selected journal articles, working papers, media coverage, and commentary is www.rgemonitor.com LBS subscribes to this website, and it is well worth it!

(If you have depressive tendencies, however, proceed with caution – Nouriel Roubini, the founder of this website, is the new holder of the title ‘Dr. Doom’, given in respect of his consistently hyper-negative assessment of the US subprime crisis, global financial turmoil, and macroeconomic prospects.) You will also find many relevant short articles at www.VoxEU.org NBER Working Papers are available (from LBS) at http://www.nber.org CEPR Discussion Papers are available (from LBS) at http://www.cepr.org IMF, BIS and OECD publications are often useful, available from their websites.

There are some good blogs that have a lot on international macroeconomics and finance –

see, for example:

Econbrowser – Menzie Chinn and James Hamilton - http://www.econbrowser.com/ Baseline Scenario – Simon Johnson and James Kwak - http://baselinescenario.com/ Pre-requisites International Macroeconomy and Competitiveness (the MBA/EMBA core course) or equivalent prior knowledge of basic macroeconomics. See the textbook we use at London Business School: D Miles and A Scott, Macroeconomics: Understanding the Wealth of Nations (2nd ed., Wiley, 2004).

Assignments and assessment Assessment will be based on one 500-word individual assignment (30%), a group report (35%), and a ‘take-home’ exam (35% - multiple choice questions and short essays).

.

The report will be on a topic in the ‘Applications’ specified below in the readings from sessions 1-9. The report should be downloaded onto Portal 48 hours or more before the relevant class discussion. All students are then invited to post comments or questions – this is not obligatory, but it helps you and the rest of the class to think through the issues and get your questions clear – and perhaps get some answers. 15 minutes will be devoted to discussion (not presentation) of the report in the relevant session – I shall assume that everyone has read it, and I am likely to put ‘cold call’ questions on it, especially if there isn’t much posted on Portal in response to the report.. I shall assign students to groups (hence topics) arbitrarily – you are welcome to trade places in a decentralised fashion (most economists believe in fostering ‘Pareto-improving’ trade). A trade itself shouldn’t go through me, but you must report it by email to Harvinder Saran (hsaran@london.edu ) so that I will know who did what when I give marks for the reports.

The assignment will be distributed on 26 October (due by 5.00 pm on 2 November). The take-home exam will be distributed on Portal and by email at 9.00 am Monday 28 November (due by 5.00 pm on Wednesday 30 November). The assignment and the exam may be submitted either as hard copy to Harvinder Saran in P326 or by email (gcmc@london.edu).





Although it should not be necessary, I nevertheless remind you of London Business School’s strict policies regarding plagiarism and the use of materials written by others. Individual assignments are to be done individually, with no sharing of work; undue similarities between papers will be noted. Any material drawn from written sources, whether printed or on the internet, must be properly referenced. In particular, the use of verbatim quotes without attribution normally would attract an automatic ‘fail’ (and if you were to copy something, it would usually be pretty easy to find it on the web – there is now software that does that!).

TOPICS AND READINGS

For the lectures, starred readings are essential, and I shall assume you have read them. Others are optional. Readings listed for applications are required only for those doing the report, but evidently you will get more out of the discussion if you read at least one of these. I have starred some of those to indicate priorities. The course pack will normally not include anything that is immediately available online. (Note: all NBER and CEPR working papers are available through LBS.)

1. Exchange rates and the current account of the balance of payments (28 September) *KO, Ch. 12

Application (group report due 1 October, discussion 5 October):

Is the US current account deficit sustainable? Must the dollar eventually crash?

P.-O. Gourinchas and H. Rey, 2007, ‘From world banker to world venture capitalist’, in R Clarida, ed., G7 Current Account Imbalances, ed. R. Clarida, University of Chicago Press for NBER, and at http://socrates.berkeley.edu/~pog/content.html *P. Krugman, ‘Will there be a dollar crisis?’, Economic Policy July 2007, pp. 435-67, at http://www.economic-policy.org/ N. Roubini, ‘Will the Bretton Woods 2 regime collapse?’, RGE Monitor 6 July 2008, http://www.rgemonitor.com/roubinimonitor/252920/will_the_bretton_woods_2_bw2_regime_collapse_like_the_original_bretton _woods_regime_did__the_coming_end_game_of_bw2

2. Real exchange rates and purchasing power parity (5 October) *KO, Ch 15 J. Haskel and H. Wolf, ‘The Law of One Price - A Case Study’, Scandinavian Journal of Economics, 2001, available as NBER WP 8112.

K. Rogoff, ‘The purchasing power parity puzzle’, Journal of Economic Literature, June 1996, 647-668, at http://www.jstor.org/stable/pdfplus/2729217.pdf

Application (due 8 October, discussion 12 October):

What do the Big Mac RERs really tell us?

*D. Parsley and S.-J. Wei, 2007, ‘A Prism into the PPP Puzzles:The Micro-foundations of Big Mac Real Exchange Rates’, Economic Journal (2007), 1336-1356.

.

D. Parsley and S-J. Wei, 2008, ‘In search of a euro effect: big lessons from a Big Mac meal’, Journal of International Money and Finance, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=995491 R. Cumby, 1996, ‘Forecasting exchange rates and relative prices with the hamburger standard’, at http://www.nber.org/papers/w5675

3. Nominal exchange rates, interest rates, and the carry trade (12 October) *KO, Chs. 13, 14, and Appendix I to Ch 17 *K. Rogoff, ‘Dornbusch’s overshooting model after 25 years’, 2002, Secs. II A and B, III A, and tables/graphs, IMF Staff Papers 49, 1-34, available through JSTOR.

*R. Portes, et al., November 2007, International Financial Stability, CEPR and ICMBS, pp.

65-69 (Sec. 6.4.1).

J. Frankel, ‘Getting carried away: how the carry trade and its potential unwinding can explain movements in international financial markets,’ November 2007, at http://ksghome.harvard.edu/~jfrankel/CarryTradeNov19-2007.pdf

Application (due 15 October, discussion 19 October):

Can exchange-rate forecasting do better than a random walk?

*K. Rogoff, ‘The failure of empirical exchange rate models’, Economic Policy Web Essay, 2002, at www.economic-policy.org R. Lyons, ‘The failure of empirical exchange-rate models – room for optimism?’, Economic Policy Web Essay, 2003, at www.economic-policy.org K Rogoff and V Stavrakeva, 2008, ‘The continuing puzzle of short horizon exchange rate forecasting’, NBER WP 14071 *T Adrian, E Etula, Hyun Song Shin, 2011, Risk Appetite and Exchange Rates (you can limit yourself to the first couple of sections, non-technical).

4. The dollar, the euro and the RMB in the long run *R. Portes and H. Rey, ‘The internationalisation of the euro’, pp. 49-56 of Global Outlook 1st quarter 1999, Economist Intelligence Unit, London. This is a non-technical, abbreviated version of: R. Portes and H. Rey, ‘The emergence of the euro as an international currency’, Economic Policy 26, April 1998, available at http://www.london.edu/faculty/rportes/ *M. Feldstein, ‘What’s next for the dollar?’, NBER WP 17260, July 2011.

M. Chinn and J. Frankel, ‘Why the euro will rival the dollar’, International Finance 11:1, 2008, pp. 49-73.

‘Global reserve currencies and the SDR’, Goldman Sachs Global Economics Paper no 196, 26 May 2010

R. Portes, ‘Global crises and international currencies’, March 2010 (especially sections 10Application (due 22 October, discussion 26 October):

Is the RMB (CNY) undervalued now (02 August USD = 6.44 CNY)?

H.Reisen, ‘On the Renminbi’, 17 December 2009 at www.voxeu.org *H-W Cheung et al., 2010, ‘Measuring Renminbi Misalignment’, Hong Kong Institute for Monetary Research WP 24/2010 C F.Bergsten, ‘Correcting the Chinese Exchange Rate’ 24 March 2010 at http://www.iie.com/publications/papers/paper.cfm?ResearchID=1523 W. R Cline, ‘Renminbi Undervaluation, China’s Surplus, and the US Trade Deficit’, August 2010 at http://www.piie.com/publications/pb/pb10-20.pdf

5. Financial globalisation (26 October) *KO, Ch. 21 and Mathematical Postscript *P. Lane and Gian Maria Milesi-Ferretti, "The Drivers of Financial Globalization", American Economic Review (Papers and Proceedings) 98(2), 327-332, May 2008.

*C. Reinhart and V. Reinhart, ‘From capital flow bonanza to financial crash’, VoxEU 23 October 2008, at http://www.voxeu.org/index.php?q=node/2478 R. Portes and H. Rey, ‘The Determinants of Cross-Border Equity Flows’, at www.london.edu/faculty/rportes/, Journal of International Economics February 2005.

R. Portes and D. Vines, Coping with International Capital Flows (Commonwealth Secretariat, 1997)

Application (due 29 October, discussion 2 November):

Are the ‘global imbalances’ really dangerous?

*R. Portes, ‘Global Imbalances’, in Macroeconomic Stability and Financial Regulation, eds.

Mathias Dewatripont, Xavier Freixas and Richard Portes, CEPR, March 2009, pp. 19-26.

Available at www.cepr.org M. Obstfeld and K. Rogoff, ‘Global Imbalances and the Financial Crisis’, August 2010, available at http://elsa.berkeley.edu/~obstfeld/.

*C. Borio and P. Disyatat, 26 July 2011, ‘Did global imbalances cause the crisis?’, VoxEU, at http://www.voxeu.org/index.php?q=node/6795 J. Gagnon, January 2011, ‘Current account imbalances coming back’, Peterson Institute for International Economics, Working Paper 11-1, at http://www.iie.com/publications/interstitial.cfm?ResearchID=1742

6. Currency and banking crises (2 November) *R. Dornbusch, 2001, ‘A primer on emerging market crises’, NBER WP 8326.

*P. Krugman, ‘Currency crises’, http://web.mit.edu/krugman/www/crises.html.

P. Blustein, 2003, The Chastening: inside the crisis that rocked the global financial system and humbled the IMF, Public Affairs.

B. Eichengreen, et al., July 2011, ‘International Financial Crises and the Multilateral Response’, Section II only, at http://www.nber.org/~confer/2011/GFC11/program.html

Application (due 5 November, discussion 9 November):

Are commodity markets driven by fundamentals or financial speculation?

*‘Commodity futures speculation’, James Hamilton on Econbrowser, 30 May 2008, at http://www.econbrowser.com/archives/2008/05/commodity_futur.html (and references there) P. Krugman, ‘Speculation and signatures’, 24 June 2008, at http://www.princeton.edu/~pkrugman/Speculation%20and%20Signatures.pdf. Also http://krugman.blogs.nytimes.com/2008/06/27/matters-of-convenience-very-wonkish/ ‘The rise and fall in oil prices’, UK Cabinet Office, December 2008, at http://www.cabinetoffice.gov.uk/media/112559/rise_and_fall.pdf For background on commodity prices, interest rates and exchange rates, see *J. Frankel, ‘Monetary policy and commodity prices,’ VoxEU 29 May 2008, at http://www.voxeu.org/index.php?q=node/1178 K Rogoff et al., ‘Where are commodity prices headed next?’, VoxEU 8 September 2008, at http://www.voxeu.org/index.php?q=node/1631



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