CM SU9A - International Monetary Economics

Faculty
Liam Lenten, La Trobe University

Course Coordinator
ISUP Secretariat

Prerequisite/progression of the course

1st year undergraduate Macroeconomics.

Course content, structure and teaching

Exchange rates are among the most idiosyncratic of macroeconomic and financial variables. At times, the value of a currency against another can alter dramatically over a short period of time for little apparent reason, a kind of behaviour that can be explained only by the vagaries of the forces of supply and demand and the fickle general sentiment in the foreign exchange market. Yet, the importance of exchange rates to the world cannot be underestimated. Unfavourable movements in the values of currencies have the potential to bankrupt multinational corporations and even to render entire industries in multiple countries unprofitable, leading to their closures. In the most extreme case, they could even compel governments to default on loan programmes, possibly triggering civil unrest.

Subsequently, this course focuses on the sensitivities of exchange rate determination and open-economy macroeconomics, in an attempt to explain some of the puzzles associated with determining the value of currencies. The topics cover international parity conditions and various models of exchange rate determination, including the monetary model, the flow model, the portfolio balance model, the currency substitution model and the news model. Also, due consideration is given to other factors, such as uncertainty, market efficiency, rational expectations and the role of news. The objective of the course is to gain a broader appreciation of the theories underpinning foreign exchange markets and their implications for exchange rate levels.

The course's development of personal competences

Analytical, computational, written and technical skills.

Learning Objectives

At the end of the course students should be able to:

Be well versed on the major historical developments in the international monetary system that have led to the current status-quo;
Recount the basics of open-economy macroeconomics;
Understand the major international parity conditions and how they affect macroeconomic and financial variables;
Understand the basic arbitrage relationships in an open economy, starting with the goods market, and also the securities market;
Explain the macroeconomic foundations for exchange rate determination, extending the basic aggregate supply and demand model to accommodate the external sector;
Examine a number of well-known models of exchange rate determination, such as the flexible-price monetary model, the fixed-price (Mundell-Fleming) model, and the sticky-price version of the monetary model;
Examine various extensions to these models, such as portfolio balances and currency substitution;
Explain the meaning and implication of the concepts of rational expectations and market efficiency;
Understand the influence of ‘news’ items on exchange rate movements.

Teaching methods

The entirety of this subject will be taught via conventional lecture-style presentations.

Examination

Final Exam: 4-hour written exam (closed book)

Total of 100 marks: Answer any FIVE long-essay questions out of EIGHT (5 x 20 = 100 marks)

Exam aids: No materials will be permitted at the exam

Re-take exam: 24-hour written exam

Recommended literature

Primary text:
Copeland, L. S. (2008) Exchange Rates and International Finance, 5th edn, Pearson Education, Harlow. ISBN: 978-0-273-71027-1)

Supplementary text:
Moosa, I. A. (2004) International Finance: An Analytical Approach, 2nd edn, McGraw-Hill, Sydney. (ISBN: 0-07-471228-4)

Journal articles and monographs:

Moosa, I. A. (1994) “The Monetary Model of Exchange Rates Revisited”, Applied Financial Economics, 4(4), 279-287.
Moosa, I. A. (1999a)
Moosa, I. A. and R. Pereira (2000) “Pitfalls in Measuring and Quoting Bilateral Exchange Rates”, Accounting Research Journal, 13(1), 106-111.
Moosa, I. A. (2000a) “A Structural Time Series Test of the Monetary Model of Exchange Rates under the German Hyperinflation”, Journal of International Financial Markets, Institutions and Money, 10(2), 213-223.
Moosa, I. A. (2002a) “A Test of the Post Keynesian Hypothesis on Expectation Formation in the Foreign Exchange Market”, Journal of Post-Keynesian Economics, 24(3), 443-457.
Moosa, I. A. (2002b) “A Test of the News Model of Exchange Rates”, Weltwirtschaftliches Archiv, 138(4), 694-710.