Open Economy Macroeconomics

Course overview and objectives:
We will be covering the main topics of international macroeconomics. We will start by studying
an intertemporal model where we will be covering balance of payments accounting and the
dynamics of the trade balance, current account, savings and investment in the open economy.
We willstudy interest rate parities as conditions for capital mobility. We will extend the model
to include non-tradeable goods and study the dynamics of the real exchange rate. We will
consider the relevance of nominal rigidities. We will study the determination of nominal
exchange rates and discuss the relevance of the Quantity Theory of Money. We will cover the
basics of optimal stabilization policy.
A fully consistent framework will be used where most of the issues will be addressed. The
framework is a simplification of the real business cycle, dynamic general equilibrium model. This
simplification is possible because the issues that are treated are the ones of the small open
economy, so that the real business cycle model can be solved in a simple way.
Objectives: (1) To provide an understanding of the main macroeconomic issues in the open
economy at an intermediate level. (2) To provide the ability to analyze formally simple, but fully
consistent, macroeconomic models.
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Course Content:
1. The open economy: Savings and investment in the open economy. The current
account and the balance of payments.

1.1. A model of a small open economy.
1.2. The national accounts for the open economy.
1.3. The balance of payments as a budget constraint.
1.4. Response of the open economy to real shocks.
2. Parities: Interest rates and purchasing power.
3. Nontradeable goods and competitiveness
3.1. A model with nontradeable goods
3.2. Real exchange rates and competitiveness.
3.3. The Dutch disease.
3.4. Debt, and sectorial adjustment.
3.5. Nominal rigidities and unemployment. A fiscal devaluation.
4. Money and exchange rates
4.1. A nominal model forthe open economy. Nominal exchange rates.
4.2. The Quantity Theory of Money and the short run effects of monetary policy
4.3. Nominal rigidities and stabilization policy