Ahmed Jamal Pirzada - International Finance and Economics

Unit on International Finance and Economics

Unit Outline

This course aims to deepen students’ understanding of how international capital flows and trade link economies across the globe. The course starts with reviewing how financial markets interact with the real economy. It then moves on to discussing why countries trade and, importantly, why (net) international capital flows in a certain direction. While international linkages help improve economic efficiency, these also give rise to vulnerabilities which can expose countries to the possibility of sovereign debt and currency crises. The course concludes by looking at some of these vulnerabilities, and policy measures which countries can take to minimise these. In doing so, the course will cover both relevant theoretical frameworks and important economic events in recent history.

*This unit is designed for students who have only basic understanding of economics. While the unit uses various mathematical models throughout, this is done in a way so that students with limited mathematical skills can also understand the content and contribute to the discussion.

Topic 1: The Financial System

EFIMM0103: Week 13, Financial System, Video 1 (2020/21)This video gives a brief overview of how money emerged in human society and what does it look like in the modern world.

EFIMM0103: Week 14, Financial System, Video 3 (2020/21)This video gives a brief overview of how central banks conduct monetary policy. We look at both monetary policy in normal times and when the economy is stuck at the effective zero lower bound.

EFIMM0103_2021: Week 14, Financial System, Video 4This video uses the material developed in Video 2 and Video 3 to understand the 2008 Global Financial Crisis.

Reading list for Topic 1

McLeay et al. (2014) - Money creation in the modern economy

Admati (2017) - A Skeptical View of Financialized Corporate Governance

Agarwal et al. (2014) - Inconsistent Regulators- Evidence from Banking

Rajan and Zingales (1998) - Financial Dependence and Growth

Arcand et al (2015) - Too Much Finance

Topic 2: International Trade

EFIMM0103_2020: International Trade, Video 1This video uses the Ricardian Trade Theory to show why countries trade with each other.

EFIMM0103_2020: Week 17 lectureThis lecture discusses the Heckscher-Ohlin model in detail. It also discusses what the HO model tells us about inequality both within and across countries.

Reading list for Topic 2

Anderson (2008) - International trade theory

Eaton and Kortum (2012) - Putting Ricardo to Work

Grossman and Helpman (1995) - Technology and Trade

Jones (2008) - Heckscher Ohlin Trade Theory

Rodrik (1995) - Political Economy of Trade Policy

Krugman (1997) - In Praise of Cheap Labour

Autor et al. (2016) - The China Shock

Topic 3: Global Imbalances

EFIMM0103_2020: International Capital Flows, Video 1This is the first video on the topic of international capital flows. It uses a simple neoclassical model to explain why some countries run persistent current account surpluses, while others run persistent current account deficits.

EFIMM0103_2020: International Capital Flows, Video 2This video provides the motivation for why countries accumulate reserves.

EFIMM0103_2020: International Capital Flows, Video 3This video uses to model to understand in more detail why countries accumulate reserves.

Reading list for Topic 3

Gourinchas and Rey (2014) - External Adjustment, Global Imbalances, Valuation Effects

Gourinchas and Jeanne (2013) - Capital Flows to Developing Countries: The Allocation Puzzle

Obstfeld (2012) - Financial flows, financial crises, and global imbalances

Passari and Rey (2015) - Financial Flows and the International Monetary System

Jeanne and Ranciere (2011) - The Optimal Level of International Reserves

Obstfeld et al. (2010) - Financial Stability, the Trilemma, and International Reserves

Topic 4: Currency Crises

EFIMM0103_2020: Currency Crises, Video 1This video provides an overview of currency crises since 1980s and what are some of the important factors which lead to such crises.

EFIMM0103_2020: Currency Crises, Video 2This video provides an introduction to the first generation currency crises model and goes through its key equations.

EFIMM0103_2020: Currency Crises, Video 3This video tries to understand what causes a currency crisis in first generation currency crises models.

EFIMM0103_2020: Currency Crises, Video 4This video discusses two key limitations of the first generation currency crisis model.

EFIMM0103_2020: Currency Crises, Video 5This video goes through the second generation of the currency crises models. It explains the basics of the second gen models and how these are different from the first gen models.

EFIMM0103_2020: Currency Crises, Video 6This is second video on the 2nd gen currency crisis models. The video discusses some of the reasons for why market sentiment may change all of a sudden, thus causing a crisis. What is the role of weaknesses in fundamentals of the economy? We also discuss why increasing the interest rate to prevent the crisis may prove counterproductive.

Reading list for Topic 4

Kaminsky (2006) - Currency crises: Are they all the same?

Flood and Garber (1984) - Collapsing Exchange Rate Regimes

Krugman (1979) - A model of balance of payments crises

Obstfeld (1996) - Models of currency crises with self-fulfilling features

Bensaid and Jeanne (1997) - The instability of fixed exchange rate systems when raising the nominal interest rate is costly

Krugman et al. (1999) - Currency Crises

Corsetti et al. (1999) - What caused the Asian currency and financial crisis

Radelet and Sachs (2000) - The Onset of the East Asian Financial Crisis

Burnside et al. (2001) - Prospective Deficits and the Asian Currency Crisis

Park et al (2017) - 20 years after the Asian Financial Crisis

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