Econ 872

Spring 2009

C. Engel

Basic Readings and Course Requirements

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.

For each topic, there will be a short introductory lecture, and then discussion of at least two of the papers listed under the topic. Everyone is expected to read the papers before the class discussion. Before class discussion begins, there will be a short quiz on the paper. The quiz will ask specific questions about the paper, but also ask you to explain the motivation and significance of the findings of the paper. In other words, you will need to think about the paper.

In addition to the quizzes, the course requirements are a paper and an in-class final.

Grade weights:

Quizzes: 1/5 of final grade

Exam: 2/5

Paper: 2/5

As we read the papers and discuss them, our goal is not only to understand the technical aspects of the paper, and the derivation of the results. In fact, our main goal is to understand the motivation for the paper – why was it written? – and the significance of the question being addressed. We want to understand also why the authors chose the approach they chose, and the significance of the finding. As we complete each topic, we will discuss possible research ideas in the area.

Paper

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 pretty good!

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 1995. 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, European Economic Review. 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”.

Paper proposal due: Wednesday, March 11. 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 15. I hope to return the draft to you within five days with comments for the final draft.

Final draft due: Wednesday, May 6. 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 paper, and use that to calculate your final grade.

1. Real exchange rates and pass-through

Atkeson, Andrew, and Ariel Burstein. 2008. “Pricing to Market, Trade Costs, and International Relative Prices,” American Economic Review 98, 1998-2031.

Burstein, Ariel, and Nir Jaimovich. 2008. “Understanding Movements in Aggregate and Product-Level Real Exchange Rates.” Working paper, UCLA and Stanford.

Nakamura, Emi, and Jón Steinsson. 2008. “Lost in Transit: Product Replacement Bias and Pricing to Market.” Working paper, Columbia.

2. LCP vs. PCP

Burstein, Ariel; Martin Eichenbaum; and, Sergio Rebelo. 2005. “Large Devaluations and the Real Exchange Rate,” Journal of Political Economy 113, 742-784.

Gopinath, Gita, and Roberto Rigobon. 2008. “Sticky Borders,” Quarterly Journal of Economics 123, 531-575.

Gopinath, Gita; Oleg Itskhoki, Rigobon. 2008. “Currency Choice and Exchange Rate Pass-Through,” Working Paper, Harvard and MIT.

3. Exchange Rates

Engel, Charles, and Kenneth West. 2005. “Exchange Rates and Fundamentals,” Journal of Political Economy 113, 485-517.

Bacchetta, Philippe, and Eric van Wincoop. 2006. “Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?” American Economic Review 96, 552-576.

Bacchetta, Philippe, and Eric van Wincoop. 2008. “On the Unstable Relationship between Exchange Rates and Fundamentals.” Working paper, Lausanne and Virginia.