International trade and finance, second year: fall 2018

The objective of the course is to offer students an introduction to two key dimensions of globalization:  international trade and international finance. The course will cover both theoretical and empirical contributions and will often refer to current policy issues in both international trade and macroeconomics. Using theoretical and empirical tools, we will consider a wide range of questions such as: what are the gains of international specialization? what is the effect of trade on inequality? How does market power of firms affect international trade? What are the consequences of trade policies? How to understand international financial flows? What is the relation between exchange rates and monetary policy? How does globalization affect the conduct of macroeconomic policies?  Is the euro an optimal currency area? Why so many international financial crises?
The prerequisite for this course is the core economics course in the first year. Although not very formalized (we will mostly use graphs to explain theoretical mechanisms), this course will use some basic mathematical tools that are common in any modern economic course.

Course syllabus


One mid-term and one final exam (2 hours each)
Participation in class (Conférence de Méthode)

Past final exams (on the international finance part) are here.

2014 exam

2018 exam with short answers


Textbook: International Economics: Theory and Policy, 10/e by Paul R. Krugman, Maurice Obstfeld and Marc Melitz (KOM), Pearson

Required readings are marked by an asterisk *.


Trade Section


1) Globalization : some stylized facts, historical comparisons, gravity equations and comparative advantage (course 1 and 2)

Slides part 1 ; Slides part 2

  • The measures of trade and financial globalization
  • The geography of trade (the rise of China and Global value chains, the gravity equation)
  • The present and the past of financial globalization
  • Ricardian Theory of Comparative Advantage

* KOM Chapter 2 and 3

Further readings:

- US-China trade war prompts rethink on supply chains, FT article Sept. 2018.

- Alan Taylor, 2004, Global Finance:Past and Present

- Kevin H. O'Rourke and Jeffrey G. Williamson Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, MIT press, 1999.

- The Age of Global Value Chains: Maps and Policy Issues, João Amador, Filippo di Mauro 09 July 2015

- Richard Baldwin and Philippe Martin, Two Waves of Globalisation: Superficial Similarities, Fundamental Differences ", NBER working paper 6904. Published in Globalization and Labor, edited by H. Siebert, 1999.


2) Globalization, employment, inequality and wages (course 2)


  • HOS Theory
  • Trade and Inequalities
  • The "China shock"

* KOM: chapter 5

* Autor, D. H., Dorn, D., & Hanson, G. H. (2016). The china shock: Learning from labor-market adjustment to large changes in trade. Annual Review of Economics, 8, 205-240.
- Malgouyres, C. (2017). The impact of chinese import competition on the local structure of employment and wages: Evidence from france. Journal of Regional Science, 57(3), 411-441.
- Jan Reenen, J. “Wage Inequality, Technology and Trade: 21st Century Evidence.” Labour Economics (December 2011), pp. 30–741.

3) International trade and market power (course 3 and 4)


  • Trade and Imperfect Competition
  • Product Differentiation
  • Market size and European integration

* KOM : chapter 8

- Charlotte Emlinger & Sophie Piton, World Trade Flows Characterization:
Unit Values, Trade Types and Price Range
s, Cepii No 2014-26 – December Working Paper

- Feenstra, Robert C. 2018. "Alternative Sources of the Gains from International Trade: Variety, Creative Destruction, and Markups." Journal of Economic Perspectives, 32 (2): 25-46.
- Johnson, R. 2014, “Five  Facts  about  Value-Added  Exports  and  Implications  for  Macroeconomics  and  Trade  Research,”  Journal  of  Economic  Perspectives,  Vol.  28,  No.  2,  Spring  2014.
- Trésor-Éco n° 207 - Le commerce de la France en valeur ajoutée  24 octobre 2017.
- Trésor-Éco n° 212 - Potentiels de commerce : quelle stratégie pour le commerce extérieur ? 20 décembre 2017.

4). The decision to export and/or invest abroad (course 4)


  • Why are exporter firms different from others?
  • How does trade affect different firms differently?

* KOM: chapter 8

* Mayer, T. and Ottaviano, G. (read chapters 2 and 3) “The Happy Few: The Internationalisation of European Firms: New Facts Based on Firm-Level Evidence.” Bruegel report, 2008.
- Melitz M. and Trefler D. “Gains from Trade When Firms Matter.” Journal of Economic Perspectives 26 (2012), pp. 91–118.
- Trésor-Éco n° 122 - Quel positionnement « hors-prix » de la France parmi les économies avancées ? 7 janvier 2014.

5). Trade policies (course 5 and 6)

Slides1; Slides 2

  • Trade policy instruments (tariffs, quotas and regulations)
  • Strategic trade policies
  • The return of protectionnist policies and its impact
  • Multilateral trade negotiations
  • Regional and bilateral trade agreements
  • Brexit

* KOM: chapters 9 and 10

* Jean S., Martin P. and Sapir, A., (2018), CAE note, International Trade Under Attack: What Strategy for Europe?

- On Nordhaus (Nobel Price 2018) view on climate change and international trade: Climate Clubs: Overcoming Free-riding in International Climate Policy, American Economic Review, vol. 105, no. 4, April 2015. A less technical version is here

- on the latest on trade wars see: Chad Bown analysis at PIEE

- The new NAFTA explained

- Brexit: Customs union choice poses Brexit dilemma for EU, FT, October 5, 2018

- Brexit timeline, FT October 8 2018

- Baldwin, Richard. 2016. "The World Trade Organization and the Future of Multilateralism." Journal of Economic Perspectives, 30 (1): 95-116.
- Dhingra, Swati; Hanwei Huang; Gianmarco Ottaviano; João Paulo Pessoa; Thomas Sampson (2017).  « The costs and benefits of leaving the EU: trade effects » Economic Policy, Volume 32, Issue 92 : 651–705.
- Boz, E., Gopinath, G. and Plagborg-Møller, M, (2017). Global Trade and the Dollar. International Monetary Fund.
- Bureau, D., Lionel Fontagné and Katheline Schubert, 2017, CAE Note, Trade and Climate: Towards Reconciliation

International Finance and Macroeconomics Section


1) Financial Globalization, Capital Flows and the Balance of Payments (course 7)


  • Financial Globalization
  • National Income Identities and the Balance of Payments
  • Net foreign asset positions
  • The exorbitant privilege of the dollar

* KOM: chapter 13

* IMF Reform: The Unfinished Agenda (read chapter 2), José De Gregorio, Barry Eichengreen, Takatoshi Ito, Charles Wyplosz, September 2018

More technical: Gabriel Zucman, The Missing Wealth of Nations, Are Europe and the U.S. net Debtors or net Creditors?, Quarterly Journal of Economics, 2013, 128(3): 1321-1364.

2) Exchange rates, interest rates expectations and financial markets (course 8)


  • Foreign exchange markets
  • The exchange rate as a relative price and as a price of an asset
  • The uncovered interest parity condition and the role of expectations

* Textbook KOM : chapter 14 and 15

BIS, Downsized FX markets: causes and implications, 2016
Coeuré, Benoit, 2017, Monetary policy, exchange rates and capital flows, ECB
BIS Triennial Central Bank Survey Foreign exchange turnover in April 2016
More technical: Barbara Rossi, Exchange rate predictability, Journal of Economic Literature, December 2013.

3) Long term exchange rate and inflation (course 9)


  • Purchasing Power Parity (PPP)
  • Why do poorer countries have lower prices? The Balassa-Samuelson effect

*Textbook KOM : chapter 16

The Balassa-Samuelson Relationship and the Renminbi, Jeffrey Frankel, december 2006
China is not yet number one, Jeffrey Frankel, VOXEU, , May 2014

4) Production and exchange rate in the short run (course 9 and 10)


  • Monetary policy, interest rate and the exchange rate
  • The Mundell-Fleming model (AA/DD version)
  • Economic policy in an open economy, spillovers of fiscal and monetary policies

*Textbook: KOM: chapter 17

5) Fixed exchange rates regimes and currency crises


  • The loss of monetary policy autonomy under fixed exchange rates (the trilemma and its recent challenge), currency wars
  • Capital controls

* Textbook KOM: chapter 18

Rey, Hélène (2016). International Channels of Transmission of Monetary Policy and the Mundellian Trilemma. IMF Economic Review, vol 64(1), 2016, pages 6-35.

A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies, by Maurice Obstfeld, Jonathan D. Ostry, and Mahvash S. Qureshi, June 2017, IMF working paper.

*[Blog version: vox column]

6) The euro and currency areas


  • The theory of optimal currency areas
  • The European experience
  • Sovereign debt crises and the euro crisis

* Textbook KOM : chapters 20 and 22

From Financial Crash to Debt Crisis, Carmen M. Reinhart and Kenneth S. Rogoff, NBER Working Paper No. 15795 2010
    Sovereign default and debt restructuring: Was Argentina’s ‘haircut’ excessive? Sebastian Edwards 04 March 2015, VOXEU
    The Greek debt restructuring: an autopsy, Jeromin Zettelmeyer, Christoph Trebesch, Mitu Gulati, Economic Policy (2013) 28 (75): 513-563.
    Sovereign-debt relief and its aftermath: The 1930s, the 1990s, the future?, VOXEU, Carmen M Reinhart, Christoph Trebesch 21 October 2014
    Philip Lane, 2012, The European Sovereign Debt Crisis, Journal of Economic Perspectives—Volume 26, Number 3—Summer 2012
    What caused the great recession in the Eurozone? What could have avoided it? Philippe Martin and Thomas Philippon, 2014, VOXEU
    The Euro’s Three Crises, Jay C. Shambaugh, Brookings Papers on Economic Activity Spring 2012
    Pierre-Olivier Gourinchas, Maurice Obstfeld, Understanding past and future financial crises, 2012
    More technical:
    U. Panizza, F. Sturzenegger, and J. Zettelmeye, Journal of Economic Literature 2009, The Economics and Law of Sovereign Debt and Default
    M. Obstfeld, 2013, Finance at Center Stage: Some Lessons of the Euro Crisis.
    P-0 Gourinchas and M. Obstfeld, Stories of the Twentieth Century for the Twenty-First, NBER Working Paper No. 17252, July 2011