ECON BC3038 International Money and Finance

Prof. Burgstaller, Fall 2005

The course is an introduction to balance of payments and exchange rate theory. It is built around a single organizing idea: the idea that the foreign exchange market--in which national currencies are traded and exchange rates determined--is not governed by payments for international flows of goods and services. Rather, it is driven by transactions of arbitrageurs and speculators, who are in charge of maximizing the rate of return on stocks of financial assets. In an open economy with capital mobility, these financial assets comprise instruments denominated in different currencies--hence the need to pass through the foreign exchange market in order to trade them. In sum, the foreign exchange market proximately links national financial markets (money, bond, and stock markets), not national goods markets. According to this view, international imbalances in goods trade and “real” economy shocks, such as oil price and productivity changes, affect exchange rates only to the extent that they manage to alter the arbitrage opportunities and speculative expectations of actors in international financial markets. A parallel argument applies to a system of exchange rates fixed by central banks, in which case it is a country’s money supply that is dictated by financial market behavior.
It is with this theoretical perspective in mind that we will approach the topics listed in the course catalogue description.

Prerequisites: Intermediate macroeconomics (e.g. Econ BC 3033)