Master EPP : International Macroeconomics II


International macroeconomics II

M2, Spring 2015, master EPP, Prof. Nicolas Coeurdacier (SciencesPo) and Daniele Siena (Banque de France)



The course deals with important policy and academic topics in international macro and is a deepening of International Macroeconomics I.
The first part (Lecures 1-6, taught by Nicolas Coeurdacier) deals with international capital flows. It starts with international risk sharing, the international diversification of portfolios and asset prices. It provides the main stylized facts on international asset allocation across time, across countries and across assets. It also provides the technical tools to incorporate non-trivial portfolio choices in international macro models. The following lectures deal with recent models on capital flows, global imbalances and net foreign asset dynamics.
The second part (Lecture 7-12, taught by Daniele Siena) will focus on financial crisis and on the international transmission of shocks in a financially integrated world. Models are introduced as tools to understand the recent economic developments in the world. The course will start with a general introduction on financial crisis, which will present different types of crisis and will then analyze in details currency and sovereign debt crisis. The last part of the course will concentrate on the role of frictions in international financial markets for the transmission of shocks across countries.


1 mid-term homework (25%) [pdf] - to be handed back at lecture 8  - Correction
1 student presentation in class of 20 min by group of 2 (25%)
1 Final exam in class (50%) - Correction

Reading List and Slides

*compulsory readings

**articles available for students presentation

Lectures 1-4. International portfolios, asset prices and risk sharing
Part 1: International portfolios [SLIDES Part 1]

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.

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

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]

Baxter M, U. Jermann and R. King, Non-traded Goods, Nontraded factors and International Non-diversification, Journal of International Economics, April 1998, 211-229.

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 [pdf]

Van Wincoop, E. and F. Warnock, 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, Kollmann and Martin, 2010, International Portfolios, Capital Accumulation and Foreign Assets Dynamics, Journal of International Economics

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]

Coeurdacier N., Kollmann R. and Martin P., 2007, International portfolios with supply, demand and redistributive shocks, prepared for the NBER International Seminar in Macroeconomics

Coeurdacier N and Gourinchas, P.O, 2012, When Bonds Matter: Home Bias in Goods and Assets, NBER Working Paper 17560

Methodology [technical appendix]

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

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]

Part 2: International capital flows and transaction costs: theory and empirics [SLIDES Part 2]

The geography of international capital flows


P. Martin and H. Rey, 2004. Financial Super-Markets: Size Matters for Asset Trade. Journal of International Economics, 64, 335– 36


*Portes, R. et H. Rey, 2005. The Determinants of Cross-Border Equity Flows, Journal of International Economics, 65 (2), 269-296.

Aviat, N. and N. Coeurdacier, 2007. The geography of trade in goods and asset holdings, Journal of International Economics

P. Martin and N. Coeurdacier, 2009. The Geography of Asset Trade and the Euro: Insiders and Outsiders, 2009, Journal of the Japanese and International Economies. Volume 3, issue 2, pages 87-240, June.

N. Coeurdacier and  S. Guibaud, 2011. International Portfolio Diversification Is Better Than You Think. Journal of International Money and Finance, vol. 30 (2), p 289-308. [pdf]

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

Coeurdacier, N. H. Bhamra and S. Guibaud, 2013, 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 [pdf]

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.

Part 3: International asset pricing and exchange rates [SLIDES Part 3]

*Karen K. Lewis, 2011. Global Asset Pricing. NBER Working Papers 17261. [pdf]

Financial integration and the cost of capital

*Bekaert and Harvey, 2000. Foreign Speculators and Emerging Equity Markets. Journal of Finance. [pdf]

Peter Blair Henry, 2000. Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices. Journal of Finance. [pdf]

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

Exchange rate anomalies and The Forward Premium Puzzle

Froot, K.A., Thaler, R.H., 1990. Anomalies: Foreign Exchange. Journal of Economic Perspectives 4, 179–192.

Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June

**Emmanuel Farhi and Xavier Gabaix, 2008. Rare disasters and exchange rates. NBER Working Papers 13805.

Adrien Verdelhan, 2010. A Habit-Based Explanation of the Exchange Rate Risk Premium. Journal of Finance, American Finance Association, vol. 65(1), pages 123-146, 02.

**Engel, Charles, 2011. The Real Exchange Rate, Real Interest Rates and the Risk Premium. Mimeo University of Wisconsin.

Devereux , M.B. and Hnatkovska, V., 2011. Consumption Risk-Sharing and the Real Exchange Rate: Why does the Nominal Exchange Rate Make Such a Difference? NBER Working Papers 17288

Lecture 5-6. New views on Net foreign asset dynamics and global imbalances
Part 1. New views on global imbalances [SLIDES Part 4]

Gourinahas and Rey, 2014, External Adjustment, Global Imbalances, Valuation Effects. Chapter for Handbook of International Economics, Gopinath, Helpman and Rogoff eds. [pdf]

*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. [pdf]

Caballero, R., Gourinchas, P-O and Fahri E., Financial Crash, Commodity Prices and Global Imbalances, Brookings Papers on Economic Activity 2008, 2, pp1-55

*Coeurdacier, N., Guibaud, S. and Jin, K., 2014, Credit constraints and growth in a global economy. [pdf]

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

**Bachetta, P. and Benhima, K., The Demand for Liquid Assets, Corporate Saving, and Global Imbalances, with Philippe Bacchetta, December 2010, DEEP Working paper n°10.12, forthcoming JEEA [pdf]

Part 2. Net foreign assets and valuation effects in portfolio models

[if time permits]

Lane, P. and G.M Milesi-Feretti, 2007, The External Wealth of Nations Mark II, Journal of International Economics, 73

Devereux and Sutherland, 2010, Valuation effects and the dynamics of net external assets, Journal of International Economics

Pavlova A. and R. Rigobon, 2010, An Asset-Pricing View of External Adjustment, Journal of International Economics

**Rey, H., Gourinchas P-O, and Govillot, N., 2010, Exorbitant Privilege and Exorbitant Duty, mimeo LBS [pdf]


Lectures 7-12

Taught by Daniele Siena, Banque de France

Link toward website


Lectures 7-8. Financial Crisis: Currency Crisis

Part 1. Financial crisis and currency crisis

Barry Eichengreen & Andrew K. Rose, 1999, Contagious Currency Crises: Channels of Conveyance, NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7), pages 29-56, National Bureau of Economic Research, Inc.

Bordo, M.D., B. Eichengreen, D. Klingebiel, and M.S. Martinez-Peria, 2001, Is the Crisis Problem Growing More Severe? Economic Policy, April

Barry Eichengreen & Andrew K. Rose, 2003, Does It Pay to Defend against a Speculative Attack?, NBER Chapters, in: Managing Currency Crises in Emerging Markets, pages 61-86, National Bureau of Economic Research, Inc.

Michael D. Bordo & John S. Landon-Lane, 2010, The Global Financial Crisis of 2007-08: Is it Unprecedented?, NBER Working Papers 16589, National Bureau of Economic Research, Inc.

Barry Eichengreen & Andrew K. Rose, 2011, Flexing Your Muscles: Abandoning a Fixed Exchange Rate for Greater Flexibility, NBER Chapters, in: NBER International Seminar on Macroeconomics 2011, pages 353-391, National Bureau of Economic Research, Inc.

Guido Lorenzoni, 2015, International Financial Crises, in G. Gopinath, E. Helpman and K. Rogoff (eds.), Handbook of International Economics, Elsevier, 2015, 689-740.

Part 2.  Models of currency crisis:

First Generation:

Henderson, D. and Salant, S. 1978, Market anticipations of government policies and the price of gold. Journal of Political Economy 86, 627–48.

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

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

Flood, R. and Marion, N. 1999, Perspectives on the recent currency crisis literature, International Journal of Finance and Economics 4, 1–26.

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.

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

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

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

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.

Eichengreen, B. and Hausmann, R. 1999, Exchange rates and financial fragility. Working Paper No. 7418. Cambridge, MA: NBER.

Burnside, C., Eichenbaum, M., and Rebelo, S. 2001, Hedging and financial fragility in fixed exchange rate regimes. European Economic Review 45, 1151–93.

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

Lectures 9-10.  Sovereign debt crisis
Part 1. Sovereign Debt Crises with self-fullling features

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

Alesina, A., Prati, A. and Tabellini, G, 1990, Public Confidence and Debt Management: A Model and a Case Study of Italy, in R. Dornbusch and M. Draghi, (eds.), Public Debt Management: Theory and History (Cambridge: Cambridge University Press), 94118

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

Patrick Bolton and Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," NBER Working Papers 16899, National Bureau of Economic Research, Inc.

Lorenzoni, G. and I. Werning, 2013, Slow moving debt crises, mimeo.

Part 2.  Asymmetric information, limited contract enforcement and no trade result

Gale, Douglas and Hellwig, Martin (1985). Incentive-Compatible Debt Contracts: The One-Period Problem", Review of Economic Studies, Vol. 52(4), 647-63.

Cole, Harold L and Kocherlakota, Narayana R (2001). Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies Vol. 68(3), pages 523-42.

Kehoe, Timothy J and Levine, David K (1993). Debt-Constrained Asset Markets," Review of Economic Studies Vol. 60(4), pages 865-88, October.

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.

Lectures 11-12. International Transmission of Shocks
Part 1.  Models with financial linkages between countries

Michael B. Devereux and James Yetman (2010). Leverage Constraints and the International Transmission of Shocks, Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper No. 45.

Kollmann, Robert, Enders, Zeno and Muller, Gernot J.(2011). Global banking and international business cycles," European Economic Review, Elsevier, vol. 55(3), pages 407-426, April.

Luca Dedola & Giovanni Lombardo, 2012, Financial frictions, financial integration and the international propagation of shocks, Economic Policy, vol. 27(70), pages 319-359, 04.

van Wincoop, Eric. 2013. "International Contagion through Leveraged Financial Institutions." American Economic Journal: Macroeconomics, 5(3): 152-89.

Perri, Fabrizio and Vincenzo Quadrini, 2014, International Recessions, mimeo. (see

Part 2.  Comovements with limited commitment and complete markets

Kehoe, Patrick J. and Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica Vol. 70(3), pages 907-928, May.

Small open economies with exogenous interest rates

Neumeyer, Pablo A. and Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.

A small open economy with endogenous default risk

Arellano, Cristina (2008), "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.

Other possible readings for student presentations

Lectures 1-6

  • 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 [pdf]
  • 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 (also NBER WP 8404) [pdf]
  • Tille, C. and E. Van Wincoop, 2010, A New Perspective on the "New Rule of the Current Account", Journal of International Economics, 80(1), 89-99 [pdf]
  • P. Buera and Y Shin, 2010. Productivity Growth and Capital Flows: The Dynamics of Reforms. Mimeo UCLA. [pdf]
  • Song, Storesletten, Zilibotti, 2011. Growing like China. American Economic Review. [pdf]