Master in Economics : Advanced International Macroeconomics


Advanced International Macroeconomics

M2, Spring 2018, Master in Economics, Prof. Nicolas Coeurdacier



Financial integration, growth and capital flows

Long-term capital flows and global imbalances

International risk-sharing and business cycles

International financial crises



There will be no single set text, but there will be frequent citations from the following textbooks:

Handbook of International Economics, Volume 4, 1st Edition, 2014, by Gita Gopinath, Elhanan Helpman, Kenneth Rogoff

M. Obstfeld and K. Rogoff, Foundations of International Macroeconomics (MIT Press, 1996)


There will be 2 problem sets (2x15%) and a presentation by students at the last lecture (20%) and a final examination (50%).

Homework 1 - [delivered at lecture 4 to be handed back in class at lecture 6] - Correction

Homework 2 - [delivered at lecture 8 to be handed back in class at lecture 10] - Correction

Final exam sample

Final exam correction



* denotes compulsory readings.

** are suggestions for the students presentations

Lectures 1-2 : Financial integration, growth and capital Flows
Part 1 - Capital flows and welfare gains from financial integration

M. Ayhan Kose, Eswar Prasad, Kenneth S. Rogoff, Shang-Jin Wei, 2006, Financial Globalization: A Reappraisal, NBER Working Paper No. 12484

Peter Blair Henry, 2007. Capital Account Liberalization: Theory, Evidence, and Speculation, Journal of Economic Literature, vol. 45(4), pages 887-935, December

*Caselli, F. and Feyrer, J., 2007, The Marginal Product of Capital. Quarterly Journal of Economics.

*P.-O. Gourinchas and O. Jeanne, The Elusive Gains of International Financial Integration, 2006, Review of Economic Studies 73, pp. 715-741 [simplified version details]

Coeurdacier, N., Rey, H. and Winant, P., 2017. Financial integration and growth in a risky world. Mimeo SciencesPo and LBS. [pdf]

Bekaert, Harvey and Lundblad, Does Financial Liberalization Spur Growth?, Journal of Financial Economics 77, 2005, 3-55.

If time permits: Financial integration and specialization.

Obstfeld, M., 1994, Risk-Taking, Global Diversification and Growth, American Economic Review, 84, 1310-1329.

G. Saint-Paul, 1992, Technological choice, financial markets, and economic development, European Economic Review, Vol. 36, pp. 763-781

Kalemli-Ozcan, S., Sorensen B.E., Yosha, O., 2003, Risk-Sharing and Industrial Specialization: Regional and International Evidence, American Economic Review, 93.

Part 2 - Capital flows: assessing long-run efficiency

Lucas R., 1990. Why Doesn’t Capital Flow from Rich to Poor Countries? American Economic Review, 80(2), 92-96

*Heathcote, J. and Perri, F., 2013, Assessing International Efficiency. Sections 2 and 3. Hanbook of International Economics, forthcoming [pdf]

*Gourinchas, P-O, and Jeanne, O., 2013. Capital Flows to Developing Countries: The Allocation Puzzle, Review of Economic Studies. [link]

Lectures 3-4 : Long-term capital flows and global imbalances

*P.O. Gourinchas and H. Rey, 2014. External Adjustment, Global Imbalances, Valuation Effects, Handbook of International Economics, vol 4, G. Gopinath, H. Helpman and K. Rogoff eds., chapter 10. Read Section 4. pp604-621. [link]

Part 1 - Financial Frictions and Capital Flows

Caballero, R.J., E. Farhi, and P. O. Gourinchas. 2008. An Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates, American Economic Review 98(1): 358–93.

*Coeurdacier, N., Guibaud, S. and Jin, K., 2015, Credit constraints and growth in a global economy, American Economic Review.

**Song, Storesletten and Zilibotti, 2011. Growing Like China, American Economic Review, vol. 101(1), pp. 196-233.

**Martin, A. and Ventura, J., 2012. Financial Reform and Capital Flows: Insights from General Equilibrium [pdf] in Caballero, R. and Hebel, K., Economic Policy in Emerging Economies, Central Bank of Chile.

**Mendoza E., Quadrini V. & Rios-Rull J.V., 2009, Financial Integration, Financial Development and Global Imbalances, Journal of Political Economy [pdf]

Bachetta, P. and Benhima, K., 2015. The Demand for Liquid Assets, Corporate Saving, and International Capital Flows, Journal of the European Economic Association [pdf]

Part 2 - Demographics, Capital Flows and the World Interest Rate

*Domeij, D. and Floden, M., 2006. Population Aging and International Capital Flows. International Economic Review, vol. 47(3), 1013-1032.

Backus, D., Cooley, T., and Henriksen, E., 2014. Demography and Low-Frequency Capital Flows. Journal of International Economics, 92(1).

Barany, Z., Coeurdacier, N. and Guibaud, S., 2017. Capital Flows in an Aging World. Mimeo SciencesPo.

**Eggertsson, G., Mehrotra, N., Singh, S. and L. Summers, 2016. A Contagious Malady? Open Economy Dimensions of Secular Stagnation, IMF Economic Review, Vol. 64(4), pp. 581-634.

Lecture 5-8. International Risk sharing and business cycles
Part 1 - Baseline one-good model [SLIDES]

*Obstfeld and Rogoff Chapter 5

Complete markets

*Backus, D., P. Kehoe and F. Kydland, ''International Business Cycles: Theory and Evidence'', quarterly review, fall 1993 (1st part)

Backus, D., P. Kehoe and F. Kydland, ''International Real Business Cycles'', Journal of Political Economy, Aug. 1992, 100(4), 745-775 

Incomplete markets: risk-free bond-only economy

*Kollmann, R., 1996, Incomplete Asset Markets and the Cross-Country Consumption Correlation Puzzle, Journal of Economic Dynamics and Control, Vol.20, pp.945-962.

Baxter, M. and Crucini, M., 1995. Business Cycles and the Asset Structure of Foreign Trade, International Economic Review.

Financial frictions and international transmission of shocks [if time permits]

**Perri, F. and Quadrini, V., 2017. International Recessions. American Economic Review, forthcoming.

Empirical evidence [if time permits] [see slides below]

Kalemli-Ozcan, Papaioannou and Peydro, 2013. Financial Regulation, Financial Globalization and the Synchronization of Economic Activity, Journal of Finance.

Kalemli-Ozcan, Papaioannou and Perri, 2012. Global banks and crisis transmission, Journal of International Economics.

Part 2 - Multiple goods [SLIDES]

*Heathcote, J. and Perri, F., 2013, Assessing International Efficiency. Section 4. Hanbook of International Economics, forthcoming [pdf]

Terms-of-trade and risk-sharing with complete markets 

*Backus, D., P. Kehoe and F. Kydland, ''International Business Cycles: Theory and Evidence'', quarterly review, fall 1993 (2nd part)

Backus, D. ,P. Kehoe and F. Kydland, ''Dynamics of the trade balance and the terms of trade: the J curve ?'' American Economic Review, Mar 1994, 84(1), 84-103

Backus, D., and G.W, Smith, 1993, Consumption and Real Exchange Rates in Dynamic Economies with Non-traded Goods, Journal of International Economics, 35, 297-316.

Incomplete markets

*Cole H. and M. Obstfeld, 1991. Commodity Trade and International Risk Sharing: How much do Financial Markets Matter?", Journal of Monetary Economics 28 (August): 3-24.

Heathcote, J. and F. Perri, 2002, “Financial Autarky and International Business Cycles”, Journal of Monetary Economics, 49 (3), 601-627.

Kollmann, R., 1995, Consumption, Real Exchange Rates and the Structure of International Asset Markets, Journal of International Money and Finance, 1995, Vol. 14, pp.191-211.

**Corsetti G., Dedola L. and Leduc S., 2007, International Risk Sharing and the transmission of productivity shocks, Review of Economic Studies [pdf]

Empirical evidence [if time permits] [extra SLIDES]

Devereux , M.B. and Hnatkovska, V., 2013. Borders and Nominal Exchange Rates in Risk-Sharing. Mimeo UBC

Part 3 - International Diversification [SLIDES]

*Coeurdacier, N. and Rey, H. Home Bias in Open Economy Financial Macroeconomics, 2013, Journal of Economic Literature [pdf]

International Portfolios Puzzles

French K. and J. Poterba, 1991, Investor diversification and international equity markets, American Economic Review 81, 222-226

Lewis , Trying to Explain Home Bias in Equities and Consumption, Journal of Economic Literature 37, June 1999, 571-608.

The role of Trading Costs and Non-Tradables

*Obstfeld M. and K. Rogoff, 2000, The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?,  NBER Macroeconomics Annual [pdf]

Obstfeld's Ohlin Lecture: International Risk Sharing and the Cost of Trade.

Coeurdacier N., Do trade costs in goods markets lead to home bias in equities?, Journal of International Economics, 2009 [link]

Van Wincoop, E. and F. Warnock, 2010, Is Home Bias in Assets Related to Home Bias in Goods?, Journal of International Money and Finance.

The role of Human Capital

*Baxter, M. et U. Jermann, 1997, The international portfolio diversification is worse than you think, American Economic Review, 87 (1), 170-80 [pdf]

Heathcote, J. and F. Perri, 2013, The International Diversification Puzzle is not as bad as you think, Journal of Political Economy. [pdf]

Coeurdacier N and Gourinchas, P.O, 2016, When Bonds Matter: Home Bias in Goods and Assets, Journal of Monetary Economics. [link]

Coeurdacier, Kollmann and Martin, 2010, International Portfolios, Capital Accumulation and Foreign Assets Dynamics, Journal of International Economics [link]

Bottazi, L., P. Pesenti et E. Van Wincoop, 1996, Wages, Profits and the international portfolio puzzle, European Economic Review, 40 (2), 219-254.

Engel and Matsumoto, 2009, The International Diversification Puzzle When Prices are Sticky: It’s Really about Exchange-Rate Hedging not Equity Portfolios, American Economic Journal: Macroeconomics 1, 155-188 [pdf]

Methodology [technical appendix]

Devereux, M. and A. Sutherland, 2006, Country Portfolios in Open Economy Macro Models, JEEA [link]

Tille, C. and E. Van Wincoop, 2010, International Capital Flows, Journal of International Economics, 80(2), 157-175 (also National Bureau of Economic Research Working Paper 12856) [pdf]

Transaction costs versus gains from international risk sharing [if time permits]

Martin, P. et H. Rey, 2004, Financial Super-Markets: Size Matters for Asset Trade, Journal of International Economics, 64, 335-361.

Coeurdacier, N. H. Bhamra and S. Guibaud, 2014, A Dynamic Equilibrium Model of Imperfectly Integrated Financial Markets, Journal of Economic Theory.

Heathcote, J. and F. Perri, 2004, Financial Globalization and Real Regionalization, Journal of Economic Theory, 119 (1), 207-243.

Van Wincoop, E., 1999. How big are potential welfare gains from international risksharing?. Journal of International Economics, Elsevier, vol. 47(1), pages 109-135.

Lewis, K., 2000, Why do stocks and consumption imply such different gains from international risk sharing?, Journal of International Economics 52, 1-35.

Lectures 9-11. International Financial Crisis

*Guido Lorenzoni, 2014, International Financial Crises, in G. Gopinath, E. Helpman and K. Rogoff (eds.), Handbook of International Economics, Elsevier, 689-740.

Rogoff, K. and C. Reinhart, This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises, NBER Working Paper 13881, March 2008. [link]

Part 1. Financial crisis and currency crisis [SLIDES]

First Generation

Krugman, P. 1979, A model of balance of payments crises, Journal of Money, Credit and Banking 11, 311–25. [pdf]

Flood, R., and Garber, P. 1984, Collapsing exchange rate regimes: some linear examples, Journal of International Economics 17, 1–13. [link]

Second Generation

Obstfeld, M. 1994, The logic of currency crises, Cahiers Economiques et Monétaires 43, 189–213.

Obstfeld, M. 1996, Models of currency crises with self-fulfilling features. European Economic Review 40, 1037–47. [pdf]

Jeanne, O. 1997, Are currency crisis self-fulfilling? A test, Journal of International Economics 43, 263-286. [link]

Jeanne, O. 2000, Currency crises: a perspective on recent theoretical developments. Special Papers in International Economics, No. 20, International Finance Section, Princeton University.

Third Generation

McKinnon, R. and Pill, H. 1996. Credible liberalizations and international capital flows: the overborrowing syndrome. In Financial Deregulation and Integration in East Asia, ed. T. Ito and A. Krueger. Chicago: University of Chicago Press.

Krugman, Paul, 1999, Balance Sheets, the Transfer Problem, and Financial Crises, International Tax and Public Finance , 6, 459-472.

R. Chang and A. Velasco, 2001, A model of Financial crises in emerging markets, Quarterly Journal of Economics, Vol. 116(2), pp. 489-517.

Aghion, Philippe, Bacchetta, Philippe, and Banerjee, Abhijit, 2004, A Corporate Balance-Sheet Approach to currency crises, Journal of Economic Theory, 119, 6-30.

Part 2: Sovereign risk and sovereign defaults [SLIDES]

*Aguiar, M. and M. Amador. 2014. Sovereign Debt. Handbook of International Economics, Vol 4. North-Holland. 647-87.

Eaton, J. and R. Fernandez,1995. Sovereign Debt, in Handbook of International Economics, Gene Grossman and Ken Rogoff, eds, North Holland.

G.A. Calvo, 1988, Servicing the public debt: The role of expectations. American Economic Review 78(4), 647–66.

Cole, H.L. and T. Kehoe, 2000, Self-fulfilling debt crises. Review of Economic Studies, 67(1), 91–116.

Bulow, Jeremy and Rogoff, Kenneth, 1989. Sovereign Debt: Is to Forgive to Forget?, American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.

*Gopinath, G. and Aguiar, M., Defaultable Debt, Interest Rates and the Current Account, Journal of International Economics, June 2006, Volume 69(1), pp. 64-83.

Arellano C., 2008. Default Risk, the Real Exchange Rate and Income Fluctuations in Emerging Economies, American Economic Review, Jun 2008, 98(3).

Aguiar, M., Chatterjee, S., Cole, H. and Stangebye, Z., 2016. Quantitative Models of Sovereign Debt Crises. Handbook of Macroeconomics. Elsevier.

**Broner, Martin and Ventura, 2010. Sovereign Risk and Secondary Markets, American Economic Review.

Part 3 - Policies --- Capital Controls and Exchange Rate Policies [if time permits]

Costinot, A., Lorenzoni, G., and I. Werning, 2011, A Theory of Capital Controls as Terms-of-Trade Manipulation, Journal of Political Economy

Farhi, E., and I. Werning, 2012, Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates, mimeo MIT.

Jeanne, O., 2012, Capital Flow Management, American Economic Review P&P.

E. Farhi, G. Gopinath, and O. Itskhoki, 2014. Fiscal Devaluations. Review of Economic Studies

Lecture 12. Students Presentations

Additional suggestions by topics

Global imbalances and capital flows

Caballero, Fahri and Gourinchas, 2016. Global Imbalances and Currency Wars at the ZLB, mimeo UC Berkeley.

Angeletos, G.-M. and V. Panousi, 2011. Financial integration, entrepreneurial risk and global dynamics. Journal of Economic Theory, vol. 146 (3)

Bai and Zhang, 2010. Solving the Feldstein–Horioka Puzzle With Financial Frictions, Econometrica.

Aguiar, M., and M. Amador. 2011. Growth in the Shadow of Expropriation. The Quarterly Journal of Economics, 126.2: 651-697.

Sovereign debt and financial crisis

Broner and Ventura, 2016. Rethinking the Effects of Financial Globalization, The Quarterly Journal of Economics, 131 (3), 1497-1542

Bocola, L., 2016. The Pass-Through of Sovereign Risk, Journal of Political Economy, 124 (4), 879-926.

Werning, I. and G. Lorenzoni, 2014. Slow Moving Debt Crises. Mimeo MIT.

International transmission of shocks and risk sharing

Kehoe and Perri, 2002, International Business Cycles with Endogenous Incomplete Markets, Econometrica.

Werning, I. and E. Fahri, 2017. Fiscal Unions. American Economic Review, forthcoming.

Chari, V.V. , P. Kehoe and E. McGrattan, 2002. Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?, Review of Economic Studies, vol. 69(3), pp 533-63.

Devereux and Yu, 2014. International Financial Integration and Crisis Contagion. NBER WP 20526

Brunnermeier, Markus K, and Yuliy Sannikov. 2015. International Credit Flows and Pecuniary Externalities. American Economic Journal: Macroeconomics 71, 1, 297-338.

Brandt M., Cochrane J. and P. Santa Clara, 2006. International Risk Sharing is better than you think (or exchange rates are much too smooth), Journal of Monetary Economics.