Transcript API 120: Macroeconomic Policy Analysis I Jeffrey Frankel, Harpel Professor of Capital Formation and Growth Harvard Kennedy School COURSE OVERVIEW.

API 120:
Macroeconomic Policy Analysis I
Jeffrey Frankel,
Harpel Professor of Capital Formation and Growth
Harvard Kennedy School
COURSE OVERVIEW
• Teaching Fellow:
Tilahun Emiru
• Course Assistants:
Jing Zhao & ________
• Faculty Assistant: Minoo Ghoreishi, Belfer 505
384-7329
• Lectures: L140, Mon. & Wed., 2:40-4:00 pm (& Fri., 9/6/13)
• Review Sessions: Fri., 8:40-10:00 & 10:10-11:30 am, L140
• Final exam:
Monday, Dec.16, 2 p.m.- 5 p.m.
– If you can’t take the exam that day, or the mid-term, don’t take the course.
• Grading :
Problem sets 25% (8 of them),
mid-term exam 25%;
final exam 50%.
• Who can take the course?
– MPA/IDs, for whom it is designed.
– One or two others,
to whom I have given permission, and at their own risk.
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Class meeting guidelines
• The same expectations for classroom conduct
reviewed in other MPA/ID classes apply here too.
– E.g., be on time.
• Use name placards.
• Fixed seating chart, same as in other classes.
• Drop boxes for all MPA/ID assignments
– on 2nd floor of Littauer behind the Forum Screen.
– Assignments must be turned in by 1pm on the day they are due.
• Assignments will be returned
via mail folders in the MPA/ID area.
• Problem set handouts
will be placed at both sides of the classroom.
• Lectures will start on time.
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Topics:
I. Devaluation and the Trade Balance
II. The Mundell-Fleming Model
III. Money and Inflation
IV. Purchasing Power Parity
V. Small Open Economies
VI. Exchange Rate Regimes
VII. Integration of Financial Markets
VIII. Exchange Rate Determination
IX. Emerging Markets
X. Portfolio Diversification
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APPENDIX 1: Overview of Models & Assumptions
Topic #
Model
Variable of
Policy
Assumptions
instrument most interest
I
Elasticities
2 traded
goods; fixed P
E
TB
II
Keynesian
+ endogenous Y
+ fiscal
+Y
MABP
nonsterilization
E or NDA
BoP
MundellFleming
III
+capital flows
Monetarist/
1 good;
Classical/
flexible prices
Equilibrium/
=> markets clear
RBC
+ money
money &
money
growth
Condition
that result
depends on
Marshall-Lerner
condition
Goods market
adjustment
Long run
Y
Exchange rate
regime &
capital mobility
Inflation π
Goods mkt. adj.
(which is high
in the long run)
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Empirical Evidence
#
Topic
Big issue
IV
PPP &
other measures of
openness to trade
International
integration and
speed of
adjustment in
goods markets
VI
Interest Rate
Parity &
other measures of
capital mobility
International
integration and
speed of
adjustment in
financial markets
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Overview of Models and Assumptions
Topic #
Model
Assumptions
P of TGs
exogenous.
Also either:
 No NTGs
 with NTGs
 NTGs, flex P
V
Small open
economy
VI
InterAgents
temporal
optimize across
optimization time
VIII
Monetary
models
X
Portfolio
Risk-aversion
diversification
Perfectly
integrated
financial mkts.
(concluded)
Policy
Variable of
Instrument most interest
Exchange
rate E &
Demand A,
esp. money
 BoP
 TB &Y
 TB
Current
Account
money
E
Debt mngmt; Risk
fx intervention premium
Condition
that result
depends on
Contractnry vs.
expansionary
effects of
devaluation
impatience;
productivty;
temporary vs.
permanent
shocks
 flexible p vs.
 sticky p
 forex risk
 country risk
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Appendix 2: Lectures by Topic
I. DEVALUATION AND THE TRADE BALANCE
1. Marshall-Lerner condition
II. THE MUNDELL-FLEMING MODEL
2. Keynesian trade balance
3. Monetary & fiscal policy with a fixed exchange rate; MABP
4. Floating exchange rates, & perfect capital mobility
III. MONEY AND INFLATION
5. Aggregate Supply, money growth and inflation
6. Monetary policy: Dynamic inconsistency & rules
7. Seignorage & hyperinflation
IV. PURCHASING POWER PARITY
8. Patterns of PPP deviations
9. Why does PPP fail?
Lectures by Topic (continued)
V. SMALL OPEN ECONOMIES
10. Devaluation in small countries
11. The Salter-Swan Model
12. Dutch Disease
VI. EXCHANGE RATE REGIMES
13. Classification; Pros & cons of fixed vs. floating rates
14. Optimum Currency Areas
15.
MIDTERM EXAM
VII. INTEGRATION OF FINANCIAL MARKETS
16. The theory of intertemporal trade
17. Interest Rate Parity conditions
Lectures by Topic (continued)
VIII. EXCHANGE RATE DETERMINATION
18. Flexible-price models; Bubbles
19. Sticky-price models & overshooting
IX. CRISES IN EMERGING MARKETS
20. Speculative attack models
21. Warning indicators; Sudden stops; Contagion;
the IMF; Contractionary devaluations
X. THE CARRY TRADE, RISK
& PORTFOLIO DIVERSIFICATION
22. Forward rate bias
23. Optimal diversification
24. Sovereign risk