Econ 872 Spring 2010 C. Engel Syllabus This course covers topics in open-economy macroeconomics and international finance. It introduces topics of current research in the field. There are several topics listed below. We may not cover all of them. Why study open-economy macroeconomics? 1. What economies are closed? Although American macroeconomics tends to favor closed-economy models, that approach is likely to become outdated soon enough. A closed-economy model may still be a reasonable approximation for the U.S. economy, but for nowhere else. Open economies have significantly different features than close economies, so it is necessary to understand how openness affects the macroeconomy. 2. It is useful to learn the field just to learn the methodologies. Open-economy macro is necessarily general equilibrium, while closed-macro sometimes focuses on partial equilibrium behavior. Open economy models are forced to deal with agents that are not homogenous because there are at least agents in two different countries, while closed models often have representative agents. Understanding the key issues in open economy macro models requires understanding the interaction between financial markets, goods markets, and factor markets, while these interactions are often trivialized in closed macro. 3. Research in open economy macro is driven by empirical anomalies – the behavior of prices, asset pricing puzzles, risk-sharing puzzles, etc. Closed macro often ignores inconvenient empirical facts, but they are impossible to ignore in open macro because they are so prominent in the study of prices, exchange rates, current account balances, etc. Referee reports For each topic, there will be a short introductory lecture. Then we will go into some recent papers in detail. We won’t be able to cover all the papers on the reading list, so I will ask you to read some of them and write “referee reports”. The referee report will be a 3-page, single-spaced report on the paper. I expect these reports to state the problem that the paper is addressing, and briefly mention the most salient related literature. Then the report should explain the “value added” of the paper – what does this paper bring to the literature that advances our understanding? The paper should then describe the most significant aspects of the approach taken by the paper and its prominent results. Finally, the report can mention any shortcomings or questions left unanswered by the paper. Homework You may work together on assignments. I only ask that each person turns in his own work – no photocopies of somebody else’s work. You should figure out on your own how much to work on your own, and how much to work with others. It is probably not optimal to let somebody else do all the work. 1Paper The requirement for the paper is to replicate and extend a recent paper in the literature. You must choose an empirical paper, and you must do some empirical work. The first part of this assignment is “replicate”. You should describe what the papers do. This should not simply be a section-by-section description of what is in the paper, nor an equation-by-equation presentation of the theoretical and/or empirical model. You should instead explain what the goal of the paper is, the main features of the theoretical and/or empirical models, and the main results. You should give an intuitive explanation of what drives the main results if you are able to. Most importantly, to the extent that you can, reproduce the main empirical findings using the data you have collected and analyzed. This does not mean that you have to reproduce the main findings exactly, but you should do your best to confirming the findings of the paper. However, the following situation may arise: Sometimes authors post all of the programs and the data used in their paper. Replication in this case is trivial. I will grade papers according to their quality, so if the replication part is trivial, the rest of the paper has to be very good to compensate. The second part of the assignment is to “extend”. Extending the work can take several varieties: You could simply update the data set. You might extend the data to other countries not in the original study. You might employ a better econometric technique. Or you might generalize the theory being tested. I want you to reproduce and extend, not just reproduce or just extend. You must do both! The papers you choose should be significant, and published since 2000. Significant papers are likely to be in major journals. You must choose your papers from one of these journals: Journal of Political Economy; American Economic Review; Quarterly Journal of Economics; Review of Economic Studies; Journal of International Economics; Journal of Monetary Economics; Review of Economics and Statistics; Journal of Money, Credit, and Banking; Journal of Finance; International Economic Review; Journal of the European Economics Association. If you would like to choose an article that is not from one of these journals, you need to talk to me about it first. Not all articles from these journals or working paper series are significant, so choose carefully. The topic you work on must be about open-economy macroeconomics. It should be related to one of the topics on our reading list. Again, if it is not, you need to talk to me. The purpose of this paper is not to undertake serious research. The real purpose is to get you acquainted with empirical work. Understanding what goes into an empirical paper will help you understand how you should interpret empirical papers. Even if your ultimate goal is to do theoretical research, it is useful for any economist to know what goes in to making an empirical “fact”. 2Paper proposal due: Wednesday, March 10. The proposal should include the name of the paper you will study and a preliminary discussion of how you will extend the paper. It should contain, in an appendix, the data sources you will use, and carefully labeled graphs of the data. First draft due: Wednesday, April 14. I hope to return the draft to you within five days with comments for the final draft. Final draft due: Wednesday, May 5. Paper must be turned in during class session. I do not accept late papers. There are no incompletes given in this class! If you do not turn in the paper on time, I will give you a grade of zero on the