International Macroeconomics and Finance
PhD course B06.3386.20 and G31.1502.001 |
Dave Backus and Pierpaolo Benigno | Fall 2006
About the Course | Outline and Schedule | Reference Material
Revised: August 28, 2006

About the Course


Even a casual look around should convince you that the world is filled with interesting and important questions related to international economics, both micro ("trade") and macro ("finance"). In trade we ask: Does (say) China or Mexico benefit from more open trade with the US? Does the US? Along the way, we might examine patterns of trade and their consequences: What products are traded, what firms trade them, and how trade affects factor prices. In macroeconomics and finance (this course) we ask: Why are price differences across countries so large and persistent? Why do countries typically run trade surpluses in recessions and deficits in booms? Why are financial capital flows from the US to China and Mexico so small? Why is there relatively little international diversification of portfolios, even among developed countries? Why do returns on bonds and equity differ across countries? Why are equity returns more highly correlated across countries than outputs? Why do emerging economies experience periodic financial crises, with sharp drops in output, a collapsing exchange rate, and sudden outflows of capital? In short, why do borders matter?

These questions motivate the course and will be referred to throughout, but we will spend most of our time on theoretical models and the tools needed to study them. The class is organized around dynamic optimum problems with a variety of frictions: nontraded or internationally differentiated products, adjustment costs, irreversibilities, enforcement problems, private information, and so on. The interaction and occasional tension between models and questions should suggest new lines of research that are interesting to you and (hopefully) others.


  • Backus: room 7-68 in the Henry Kaufman Management Center (7th floor, turn right out of the elevator, left after you go through the Economics entrance). Stop by whenever you like and send an email to set up an appointment. You can also call (212 998 0873), but I check voicemail infrequently.
  • Benigno: room 7-68 in the Henry Kaufman Management Center (7th floor, turn right out of the elevator, left after you go through the Economics entrance). Stop by whenever you like and send an email to set up an appointment. You can also call (212 998 0873), but I check voicemail infrequently.


We'll meet in Stern's Kaufman Management Center, room 5-75 (fifth floor), Mondays and Wednesdays starting September 6, 11:30-12:50.

Suggested books

We'll refer to each of these in the course:

  • Campbell and Viceira (2002), Strategic Asset Allocation, Oxford University Press.
  • Ljungqvist and Sargent (2004), Recursive Macroeconomic Theory (2nd edition),' MIT Press.
  • Mark (2001), International Macroeconomics and Finance, Blackwell.
  • Obstfeld and Rogoff (1996), Foundations of International Macroeconomics, MIT Press.
  • Woodford (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.

Requirements and grades

Our goal is to prepare you to do interesting original research. We assume you have taken the first-year macro and micro sequences or their equivalents and are prepared to put what you learned there to work. Your mission (should you accept it) includes [change as needed??]:

  • 10% of your grade: Come to class prepared, which means skim the required reading (papers marked with *s) ahead of time and be prepared to comment on it.
  • 30%: Do the problem sets, which will be graded (check, check plus, check minus). The idea is to give a good-faith effort, not spend your life doing them. They are bunched in the first half of the term.
  • 30%: Give a 15-20 minute presentation to the class on an interesting topic or paper. You should choose a paper and speak to me about it by Oct 13. The presentation should be interesting to your classmates (ie, if you bore them, you've done a bad job), clearly organized, and use slides of some sort. Read Tim Kehoe's presentation tips and take them to heart. Among the highlights: practice, don't put too much on the slides, have a clear and simple structure (question, analysis, answer, future directions).
  • 30%: Write an 8-10 page paper that makes a good start on an original research project. You should choose a topic and speak to me about it by Oct 27. The paper itself is due December 20 (no exceptions). Like the presentation, you should keep it interesting and simple: state your question, make some progress toward answering it, list issues that remain. Don't be concerned about success aand failure: if you try something and it doesn't work, report it anyway, and perhaps point to modifications you might make in the future.

More information will be distributed separately and/or discussed in class.


Outline and Schedule

The schedule below lists topics, readings (required ones marked with *'s), and due dates for assignments. Dates and topics are tentative, especially the second half: We will feel free to modify both if it suits us. (And if there's something you'd like to see more of, please let us know.) Many of the links come courtesy of NYU's terrific eLibrary. Access is automatic through NYU or NYU dial-up; outside NYU, use NYU's proxy server.

September 6-11 (intertemporal approach to the current account)

*Obstfeld and Rogoff, 1996, Foundations of International Macroeconomics, chapters 1-3.
Obstfeld and Rogoff, 1995, "The Intertemporal Approach to the Current Account,'' in G. Grossman and K. Rogoff, eds., Handbook of International Economics, vol.3, North Holland.
Sachs, 1982, "The Current Account in the Macroeconomic Adjustment Process,'' Scandinavian Journal of Economics, 84, 147-159.



September 8

Issues in international macroeconomics. Relative prices, fluctuations, growth, trade and capital flows, portfolio diversification, exchange rates and related derivatives, equity markets, sovereign debt markets, emerging market crises. Notes.

Lucas, "Why doesn't capital flow from rich to poor countries?" AER (P&P), 1990.
*Obstfeld and Rogoff, "Six major puzzles," NBER Macro Annual, 2000, plus Engel "Comment."
Prasad, Rogoff, Wei, and Kose, "Financial globalization," IMF, 2003; *slides.
Rodrik, "Sense and nonsense in globalization," Foreign Policy, 1997.

Equilibria and optima. Equilibria and optima in exchange and production economies, welfare theorems, Negishi-Mantel algorithm, homothetic preferences. Notes.

September 15

One-good exchange economies. Optimal allocations, balance of payments, date-0 and sequence equilibria, portfolio diversification. Digression on computational methods for solving equations. Notes. Matlab program.

Due at start of class: Problem Set 1.

*Ljungqvist and Sargent, Recursive Macroeconomic Theory (2nd ed), ch 8 (sections 1-6, 8-9); similar to ch 7 of the first edition (pp 143-48, 152-58).

September 22

Multigood exchange economies. Economies with different or nontraded goods, optimal allocations, real exchange rates, balance of payments, portfolio diversification. Notes. Matlab program.

Due at start of class: Problem Set 2.

Backus, "Terms of trade," JIE, 1993.
Backus, Kehoe, and Kydland, "Relative price movements," Handbook chapter, 1994.
*Backus and Smith, "Consumption and real exchange rates," JIE, 1993.
Cole and Obstfeld, "Trade and risk-sharing," JME, 1991.
Goldberg and Knetter, "Prices and exchange rates," JEL, 1997.

September 29

Two-country stochastic growth models. Consumption and output correlations, investment and current account dynamics, relative prices. Digression on LQ methods for computing equilibria. Notes. LQ methods.

*Backus, Kehoe, and Kydland, "J curve," AER, 1994.
Baxter and Crucini, "Saving-investment correlations," AER, 1993.
Stockman and Tesar, "Tastes and technology," AER, 1995.

October 6

Small open economies. Implications of smallness, asset markets, steady states, consumption and current account dynamics in emerging economies. Notes.

Due at start of class: Problem Set 3 .

Aguiar and Gopinath, "Emerging market business cycles," 2004.
Correia, Neves, and Rebelo, "Business cycles," EER, 1995.
Kraay and Ventura, "Current accounts," NBER Macro Annual, 2002, plus *Perri "Comment."
*Neumeyer and Perri, "Business cycles in emerging economies," ms, 2004.
Schmitt-Grohe and Uribe, "Closing small open economies," JIE, 2003.

October 13

International asset returns. Spot and forward currency contracts, equity returns, emerging market debt spreads. Notes.

Due at start of class: presentation topic.

*Backus, Foresi, and Telmer, "Forward premium," JF, 2001.
Bekaert and Harvey, "Emerging markets finance," J Emp Fin, 2003.
*Dumas, Harvey, and Ruiz, "International stock returns and output," JIMF, 2003.
Wright, "Discussion slides on emerging market debt," 2003.

October 20 (no class)

October 27

International portfolio diversification. Home bias, models with nontraded and differentiated goods.

Due at start of class: paper topic.

Baxter, Jermann, and King, "Nontraded goods and non-diversification," JIE, 1998.
Baxter and Jermann, "Worse than you think," AER, 1997.
Griever, Lee, and Warnock, "US measurement of security flows," FRB, 2001.
*Heathcote and Perri, "International diversification," ms, 2004.
Lewis, "Home bias," JEL, 1999.

November 3

More issues (institutions, growth, capital flows). Sources of economic growth, internal institutions and frictions, restrictions on capital flows.

Institutions and growth
Acemoglu, Johnson, and Robinson, "Institutions cause growth," ms, 2004.
Easterly and Levine, "Tropics, germs, and crops," JME, 2003.
*Glaeser, La Porta, Lopez-de-Silanes, and Shleifer, "Do institutions cause growth?," ms, 2004.
Huang and Yeung, "Asean's institutions still bad, FT, 2004.

Capital flows
*Edison and Warnock, "Measure of capital controls," J Emp Fin, 2003.
*Shleifer, "Sovereign debt," ms, 2003.

November 10

Quick fixes. Incomplete markets, sticky prices, transportation costs, irreversibilities, and so on.

Due at start of class: Problem Set 4.

Alessandria, "Law of one price and search," ms, 2001.
Allen and Gale, "Optimal crises," JF, 1998.
Baxter and Crucini, "Business cycles and asset trade," IER, 1995.
Chari, Kehoe, and McGrattan, "Monetary shocks and real exchange rates," REStud 2004.
Choi, "Exchange rates and fundamentals," ms, 2004, plus slides.
Dumas, "Spatially separated world," RFS, 1992.
Ghironi and Melitz, "International trade and macro dynamics," 2004.
Kehoe and de Cordoba, "Capital flows in Spain," ms, 1999.
Obstfeld and Rogoff, "Six major puzzles," NBER Macro Annual, 2000.

November 17 and 24

Enforcing international and sovereign constracts. Enforcement, participation constraints, optimal contracts and allocations.

Alvarez and Jermann, "Solvency constraints," RFS, 2001.
*Bulow and Rogoff, "Constant recontracting model," JPE, 1989.
Eaton and Gersovitz, "Debt with repudiation," REStud, 1981.
*Eaton and Fernandez, "Sovereign debt," Handbook chapter, 1995.
Kehoe and Perri, "Limited enforcement," JET, 2004.
*Ljungqvist and Sargent, Recursive Macroeconomic Theory (2nd ed), chs 19 (sections 1-4) and 20; ch 19 is similar to ch 15 of the first edition, pp 401-18, but ch 20 is new.
Marcet and Marimon, "Recursive contracts," ms, 1998.

December 1

Information problems and international capital flows. Nature of information, kinds of international claims, allocations with information asymmetries.

*Aiyagari, "Notes on contract theory," transcribed by Clementi.
Castro, Clementi, and MacDonald, "Investor protection and growth," QJE, 2004.
Gertler and Rogoff, "North-south lending," JME, 1990.
*Ljungqvist and Sargent, Recursive Macroeconomic Theory (2nd ed), ch 23; similar to ch 15 of the first edition, pp 435-43.

December 15


Due at start of class: Problem Set 5.

The last two classes will be used for presentations, discussion of paper topics, and/or additional topics, such as those listed below.

Topics that we will probably not have time for

Emerging market crises. Features of crises and countries that have them, policy alternatives.

Corsetti, Pesenti, and Roubini, "Asian crisis," Japan and World Ec, 1999.
Chang and Velasco, "Liquidity crises," NBER Macro Annual, 1999, plus Roubini comment.
Chang and Velasco, "Financial fragility," JET, 2000.

Industry dynamics and macroeconomics. Dynamic resource reallocations and their impact on economic growth and fluctuations.

Boergoing, Loayzaw, and Repetto, "Slow recoveries," ms, 2004.
Campbell, "Entry, exit, and business cycles," RED, 1998.

Models of trade.

Alvarez and Lucas, "Eaton-Kortum model of trade," ms, 2004.
Bernard, Eaton, Jensen, and Kortum, "Plants and productivity," AER, 2003.

Sources of productivity growth.

Chung, Mitchell, and Yeung, "Foreign direct investment and host productivity," JIBS, 2003.
Schmitz, "Brazilian iron ore" and "US iron ore," mss, 2004.

Reputation models of debt.

Bulow and Rogoff, "Forgive to forget?" AER 1989.
Cole, Dow, and English, "Debt and signalling," IER, 1995.
Wright, "Reputations and debt," ms, 2004.

Computational methods in economics. Basic tools for modern economists.

Anderson, Hansen, McGrattan, and Sargent, "Mechanics of dynamic linear economies," Handbook chapter [ps].
Colacito's Dynare links.
Judd, Numerical Methods in Economics, MIT Press, 1998, esp chs 5, 12.
Related courses and links: Nakajima | Rios-Rull | Rust | Smith

Reference Material

An admission: no one else teaches international macroeconomics this way. I did it intentionally (I think conceptual unity is helpful when you're learning), but there are lots of things you might be interested in that we haven't covered. Some examples follow: interesting papers, syllabi from related courses taught by other people, and links to many of my favorite international economists. You should spend an afternoon some time looking through all this stuff. When you do, keep your eyes open for presentation and paper topics.

Interesting papers (and possible presentation topics)

Ahearne, Griever, and Warnock, "Information and home bias," JIE, 2004.
Albuquerque, "International capital flows," JIE, 2003.
Ammer, Holland, Smith, and Warnock, "Look at me now," ms, 2004.
Atkeson and Rios-Rull, "Mexican crisis," JIE, 1995.
Bacchetta and van Wincoop, "Information heterogeneity," ms, 2003.
Begnino and Begnino, "Price stability in open economies," REStud, 2003.
Bergin, Glick, and Taylor, "Long-run price puzzle," ms, 2004.
Betts and Kehoe, "US real exchange rates," ms, 2004.
Broner, Lorenzoni, and Schmukler, "Sovereign bond spreads," ??
Burnside, Eichenbaum, and Rebelo, "Government finance in crises," 2003.
Cavallo, Kisselev, Perri, and Roubini, "Exchange rate overshooting," 2004.
Corsetti and Dedola, "International price discrimination," 2003.
Corsetti, Dedola, and Leduc, "International risk-sharing and productivity," 2003.
Crucini, Telmer, and Zachariadis, "European real exchange rates," 2001.
Eaton and Gersovitz, "Theory of expropriation," EJ, 1984.
Edison and Warnock, "Listings, capital controls, and emerging market equity," ms, 2003.
Engel, "US real exchange rates," JPE, 1999.
Ferguson, "Empire and country risk," ms, 2004.
Gertler, Gilchrist, and Natalucci, "External constraints," 2003.
Gopinath, "Lending booms," JIE, 2004.
Gourinchas and Jeanne, "Capital account liberalization," ms, 2002.
Heathcote and Perri, "Financial globalization and real regionalization," 2003.
Helpman and Razin, "A comparison of exchange rate regimes," IER, 1982.
Hsieh and Klenow, "Prices and prosperity," ms, 2003.
Hummels, "International transportation costs," ms, 1999.
Imbs, "Real effects of financial integration," ms, 2004.
Imbs, Mumtaz, Ravn, and Rey, "PPP strikes back," ms, 2004 (with commentary).
Imbs, Mumtaz, Ravn, and Rey, "What's on TV?" ms, 2004.
Jeske, "Private international debt," ms, 2001.
Jin and Myers, "R-squared around the world," ms, 2004.
Kletzer and Wright, "Sovereign debt," AER, 2000.
Li, Morck, Yang, and Yeung, "Firm specific variation in emerging markets," REStat, 2004.
Lustig and Verdelhan, "Cross-section of currency risk premia," ms, 2004.
Manasse, Roubini, and Schimmelpfennig, "Predicting debt crises," ms, 2003.
Melitz, "Trade and productivity," Econometrica, 2003; working paper.
Mendoza and Tesar, "Tax competition," ms, 2003.
Morck and Yeung, "Why investors value multinationality, JOB, 1991.
Quadrini, "Investment and liquidation," JME, 2004.
Roubini and Setser, "US external imbalances," 2004.
Roubini and Wachtel, "Current account sustainability in transition economies," ms, 2003.
Ruhl, "Elasticity puzzle," ms, 2004.
Shleifer and Wolfenzon, "Investor protection and equity markets," ms, 2000.
Veldkamp, "Media frenzies," ms, 2004.
Wachtel, "Growth and finance," Atlanta Fed Economic Review, 2003.

Related courses

Atkeson | Burstein | Chang | Crucini | Dumas & Jermann | Engel | Gourinchas | Obstfeld | Perri | Rey | Rogoff | Roubini | Svensson | Tesar | Velasco | Ventura

Some international macroeconomists

Mark Aguiar | Cristina Arellano | Andy Atkeson | Pierpaolo Benigno | Ariel Burstein | Guillermo Calvo | Jose Campa | Michele Cavallo | Roberto Chang | Mario Crucini | Bernard Dumas | Jonathan Eaton | Charles Engel (data) | Gita Gopinath | Pierre-Olivier Gourinchas | Jean Imbs | Urban Jermann | Karsten Jeske | Patrick Kehoe | Tim Kehoe | Karen Lewis | Marc Melitz | Enrique Mendoza | Maury Obstfeld | Fabrizio Perri (data) | Paolo Pesenti | Morten Ravn | Helene Rey | Ken Rogoff | Andy Rose (data) | Nouriel Roubini | Kim Ruhl | Alan Stockman | Lars Svensson | Alan Taylor | Chris Telmer | Linda Tesar | Eric van Wincoop | Andres Velasco | Jaume Ventura | Mark Wright |

Other useful sites

NYU eJournals | Bobst Business | Stern Research Data | Roubini's Global Macro | NBER | MBA Resources

© 2004 NYU Stern School of Business | Revised: August 28, 2006 | Address comments to Dave Backus.