Lecture 1 discusses the implications of openness in goods and financial markets. Openness in goods markets allows people to choose between domestic goods and foreign goods. An important determinant of their decisions is the real exchange rate—the relative price of foreign goods in terms of domestic goods. Openness in financial markets allows people to choose between domestic assets and foreign assets. This imposes a tight relation between the exchange rate, both current and expected, and domestic and foreign interest rates—a relation known as the interest parity condition.
Lecture 2 focuses on equilibrium in the domestic goods market in an open economy. It shows how the demand for domestic goods now depends also on the real exchange rate. It shows how fiscal policy affects both output and the trade balance. It discusses the conditions under which a real depreciation improves the trade balance, and increases output.
Lecture 3 characterizes goods, financial and labour markets’ equilibrium in an open economy. In other words, it gives an open economy version of the AD-AS model we saw in the macroeconomics. It shows how, under flexible exchange rates, monetary policy affects output not only through its effect on the interest rate, but also through its effect on the exchange rate. It shows how fixing the exchange rate also implies giving up the ability to change the interest rate.
Lecture 4 looks at the properties of different exchange rate regimes. It shows how, in the medium run, the real exchange rate can adjust even under a fixed exchange rate regime. It then looks at exchange rate crises under fixed exchange rates, and at movements in exchange rates under flexible exchange rates. It ends by discussing the pros and cons of various exchange rate regimes, from the adoption of a common currency such as the Euro, to the use of a currency board, to dollarization.
| The required background text is Macroeconomics, 4/e, by Olivier Jean Blanchard. The relevant chapters are 18-21 | |||
| Openness in Goods and Financial Markets Part I | Blanchard,Chapter 18 | Lecture Notes 1 | |
| Openness in Goods and Financial Markets Part II | Blanchard,Chapter 18 | ||
| The Goods Market in an Open Economy | Blanchard,Chapter 19 | Lecture Notes 2 | Output, the Interest Rate, and the Exchange Rate | Blanchard, Kapitel 20 | Lecture Notes 3 |
| Exchange Rate Regimes | Blanchard, Kapitel 21 | Lecture Notes 4 |
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