Topics in International EconomicsT1: The U.S. as the largest debtorSlide 3T2:The euroDollarizationT3: Exchange rate movementsT4: Financial CrisesT5: Choice of exchange rate regimeTopics in International Topics in International EconomicsEconomicsCh 1.Ch 1. Introduction IntroductionSlide 1-2T1: The U.S. as the largest debtorThe US current account deficit increased to $144 billion in 2004:Q1 from $127billion in 2003:Q4. (US GDP in 2003: $11,000 billion)•Why does it arise?•Why does it matter?Slide 1-3Net international investment position declines each period by the amount of current account deficit.As a result of large current account deficits in the 1980s and ’90s, the US became the largest debtor in the world.NIIP of the US: -$2430 billion (2003) -$2233 billion (2002)It is important to compare these numbers to the size of the economy.Slide 1-4T2:The euroThe euro, introduced in 1999, became the currency of 12 EU members.•Germany, France, Italy, Belgium, Netherlands, Luxemburg, Ireland, Spain, Portugal, Austria, Finland, GreeceWhat are the benefits and costs of the monetary union (giving up own national currencies and adopting a common currency)?Why did the UK, Sweden, and Denmark opt out?Slide 1-5DollarizationIn a different context, El Salvador has adopted the US dollar as legal tender. A new meaning of dollarizationWhy would any country want to give up its own currency and adopt some other country’s currency?Slide 1-6T3: Exchange rate movementsYr:Mo ¥/$ Yr:Mo €/$1968:07 360.0 1999:01 0.881978:10 176.0 1999:12 1.001985:02 259.5 2001:05 1.181997:04 126.9 2003:12 0.791998:07 143.7 2004:08 0.832004:08 111.4 2005:01 0.732005:01 103.4Exchange rate movements have been large.Can we explain them?Are flexible exchange rates more desirable than fixed rates?http://www.x-rates.com/Slide 1-7T4: Financial CrisesCurrency crises became more frequent.•ERM (exchange rate mechanism), 1992 •Mexico, 1994 •East Asia, 1997Big devaluations and subsequent economic collapsesHow to explain currency crises? How to prevent them?Slide 1-8T5: Choice of exchange rate regimeChinese Renminbi had been pegged to the US dollar since 1994 until recently.Large trade surpluses of China became a political issue.The US government and many economists recommend increased exchange rate flexibility. China revalued the RMB from 8.28 to 8.11 yuan per USD on July 22, 2005. The currency has been on managed float ever since. What kind of exchange rate system would be most appropriate for