MSc Financial Economics / Course details

The aim of the course is to provide rigorous training on some key topics in international macroeconomics. These topics include intertemporal models of the current account; capital flows and macroeconomic fluctuations; the transmission mechanism of monetary policy in an open economy in the presence of financial frictions; and dynamic stochastic general equilibrium (DSGE) models of open economies under imperfect capital mobility and financial frictions. Presentations will dwell on a series of fully-articulated models with proper micro foundations. The intuition behind key mathematical results, and their relevance for the real world, will be systematically emphasized.

 

ECON60111 is a Pre-Requisite for this unit

The aim of the course is to provide rigorous training on some key topics in international macroeconomics. These topics include intertemporal models of the current account; capital flows and macroeconomic fluctuations; the transmission mechanism of monetary policy in an open economy in the presence of financial frictions; and dynamic stochastic general equilibrium (DSGE) models of open economies under imperfect capital mobility and financial frictions. Presentations will dwell on a series of fully-articulated models with proper micro foundations. The intuition behind key mathematical results, and their relevance for the real world, will be systematically emphasized.

Upon completion of this course, students will be able to:

a) develop a clear understanding of some of the recent analytical literature in international macroeconomics, in particular on the causes of current account deficits and surpluses, and the effects of sudden floods in capital flows;

b) evaluate critically some of the claims in the literature, particularly those related to the determinants of current account imbalances, the impact of capital flows on the real exchange rate, and the role of financial frictions in the transmission mechanism of monetary policy in an open economy;

c) develop simple models of their own, from which they can derive original results, and more generally acquire a set of analytical skills that may serve them well if they choose to pursue a PhD in Economics.
 

Provisional Syllabus  

The course will consist of 10 mandatory lectures.  

Topic 1 (Lectures 1 to 3) - Two-Period Intertemporal Models of the Current Account  

These lectures will review two-period, intertemporal models of the current account. The intertemporal approach has proved to be particularly useful in understanding the nature of current account deficits, which fundamentally reflect a shortfall of domestic saving relative to domestic investment. Because they represent international borrowing and lending decisions that are a reflection of intertemporal consumption and investment decisions by households, firms, and the government, movements in the current account are best analyzed in a multi-period macroeconomic framework. A one-good, two-period model, with and without investment, will be used to study the effects of financial openness on the current account. Various extensions will also be discussed.  

Background reading: Obstfeld, Maurice, and Kenneth Rogoff, Foundations of International  
Macroeconomics, MIT Pres (Cambridge, Mass.: 1996), Chapter 1, Sections 1.1 (except 1.1.7) and 1.2 (except the material in Box 1.1).  

 

Topic 2 (Lectures 4 and 5) - Capital Flows and the Real Exchange Rate in Two-Sector, Two-Period Intertemporal Models

These lectures will study the impact of capital flows on the real exchange rate in two-sector, two-period intertemporal models. The impact of various shocks on the dynamics of capital flows and the real exchange rate will be examined.

Background reading: tbc.  

Topic 3 (Lectures 6, 7 and 8) - The Monetary Transmission Mechanism in an Open Economy with Financial Frictions  

These lectures will present a simple static model with credit market imperfections and flexible prices for monetary policy analysis in an open economy. In the model, lending rates are set as a premium over the cost of borrowing from the central bank. The premium itself is a function of firms' net worth. Banks' funding sources are perfect substitutes, and loan supply and the provision of liquidity by the central bank are perfectly elastic at the prevailing refinance rate and a shift in the risk premium. The model will be used to study the impact of changes in monetary policy instruments on output, prices, and the real exchange rate.  

Background reading: Agénor, Pierre-Richard, Monetary Policy and Macroprudential  
Regulation with Financial Frictions, MIT Press (Cambridge, Mass.: 2020), Chapter 7.  

Topic 4 (Lectures 9 and 10) - Open-Economy DSGE Models with Financial Frictions  

These lectures will provide an introduction to open-economy DSGE models with financial frictions. It will present a basic conceptual framework and will consider various extensions, including imperfect exchange rate pass-through and global banking in two-region models.  

Background readings: Agénor, Pierre-Richard, Monetary Policy and Macroprudential Regulation with Financial Frictions, MIT Press (Cambridge, Mass.: 2020), Chapters 4 and 8. Agénor, Pierre-Richard, Koray Alper, and Luiz Pereira da Silva, "External Shocks, Financial Volatility and Reserve Requirements in an Open Economy," Journal of International Money and Finance, 83 (May 2018), 23-43.  

 

Lectures

Prior to the start of the class, students are encouraged to review key mathematical formulas and results provided in the following document:

Agénor, Pierre-Richard, Mathematical Formulas and Dynamic Optimization Techniques, unpublished, University of Manchester.

Students are also encouraged to refresh their memory on key National Accounts concepts and identities, as provided for instance in

Agénor, Pierre-Richard, The Economics of Adjustment and Growth, 2nd ed., Harvard University Press, Chapter 1, Sections 1.1 to 1.3.

Both of these documents will be uploaded on the course website a week before the course starts.