internationa economics - GBV · Effect of a Subsidy to Airbus 377 HEADLINES Airbus, China and Quid Pro Quo 377 Subsidy with Cost Advantage for Boeing 379 Best Strategy for Boeing

internationaeconomics

t 256179

Contents

Preface XXIX

PART 1Introduction toInternational Trade

PART 2Patterns ofInternational Trade

CHAPTER 1 Trade in the Global Economy 1

1 International Trade 2The Basics.of World Trade 3Map of World Trade 4

H E A D L I N E S Barbie and the World Economy 5Trade Compared with GDP 10Barriers to Trade 10First "Golden Age" of Trade 1 1

H E A D L I N E S A Sea Change in Shipping 50 Years Ago 14

2 Migration and Foreign Direct Investment 15Map of Migration 15

H E A D L I N E S Balkans Need Not Apply 17H E A D L I N E S Low-Wage Workers from Mexico Dominate Latest GreatWave of Immigrants 1 8

Map of Foreign Direct Investment 19H E A D L I N E S Chinese Buyer of PC Unit Is Moving to I.B.M.'sHometown 23

3 Conclusions 23Key Points, Key Terms, and Problems

CHAPTER 2 Trade and Technology: The Ricardian Model 27

1 Reasons for Trade 29Proximity 29Resources 29Absolute Advantage 30Comparative Advantage 31

S I D E BAR David Ricardo and Mercantilism 32

2 Ricardian Model 32The Home Country 32The Foreign Country 37A P P L I C A T I O N Comparative Advantaqe in Apparel, Textiles, andWheat 39

3 Determining the Pattern of International Trade 40S I D E BAR Can Comparativ"Icewine" 41

International Trade Equilibrium 41

S I D E BAR Can Comparative Advantage Be Created? The Case of"Icewine" 41

CDNTENTS XI

Solving for Wages across Countries 45A P P L I C A T I O N Labor Productivity and Wages 47

4 Solving for International Prices 49Home Export Supply Curve 49Foreign Import Demand Curve 51International Trade Equilibrium 52A P P L I C A T i o N The Terms of Trade for Primary Commodities 53


CHAPTER 3 Gains and Losses from Trade in the Specific-FactorsModel 61

HEADLINES All Smoke, No Fire in Bolivia 63

1 Specific-Factors Model 64The Home Country 64The Foreign Country 68Overall Gains from Trade 68A P P L I C A T I o N How Large Are the Gains from Trade? 69

2 Earnings of Labor 70Determination of Wages 70Change in Relative Price of Manufactures 72A P P L I C A T I O N Manufacturing and Services in the United States:Employment and Wages across Sectors 75A P P L I C A T I O N Trade Adjustment Assistance Programs: Financing theAdjustment Costs of Trade 78

3 Earnings of Capital and Land 79H E A D L I N E S A New Safety Net for Displaced Workers 80

Determining the Payments to Capital and Land 80Numerical Example 83What It All Means 86A P P L I C A T I O N Prices in Agriculture 86

H E A D L I N E S Rise in Coffee Prices—Great for Farmers, Tough onCo-ops 90


CHAPTER 4 Trade and Resources: The Heckscher-Ohlin Model 95

1 Heckscher-Ohlin Model 97Assumptions of the Heckscher-Ohlin Model 97

XII CONTENTS

A P P L I C A T I O N Are Factor Intensities the Same across Countries? 99No-Trade Equilibrium 101Free-Trade Equilibrium 103Testing the Heckscher-Ohlin Theorem: Leontief's Paradox 108

2 Effects of Trade on Factor Prices 110Effect of Trade on the Wage and Rental of Home 1 10Determination of the Real Wage and Real Rental 1 14Changes in the Real Wage and Rental: A Numerical Example 1 15A P P L I C A T I O N Opinions toward Free Trade 119

3 Extending the Heckscher-Ohlin Model 120Many Goods, Factors, and Countries 1 20Differing Productivities across Countries 1 24Extending the Heckscher-Ohlin Theorem .127

H E A D L I N E S Food Imports Close to Matching Level of Exports 128A P P L I C A T I O N Why Does India Import Cotton Textiles? 131


Appendix to Chapter 4 138

CHAPTER 5 Movement of Labor and Capital between Countries:Migration 141

1 Movement of Labor between Countries 143Effects of Immigration in the Short Run: Specific-Factors Model 143A P P L I C A T I O N Immigration to the New World 146A P P L I C A T I O N Immigration to the United States and EuropeToday 147

H E A D L I N E S EU's New Tack on Immigration 148'Other Effects of Immigration in the Short Run 150Effects of Immigration in the Long Run 1 52Rybczynski Theorem 157Factor Price Insensitivity 1 57A P P L I C A T I O N The Effects of the Mariel Boat Lift on Industry Output inMiami 158A P P L I C A T I O N Immigration and U.S. Wages, 1990-2004 160

2 Movement of Capital between Countries: Foreign DirectInvestment 161Greenfield Investment 162FDI in the Short Run: Specific-Factors Model 162FDI in the Long Run 165

CONTENTS XIII

A P P L I C A T I O N The Effect of FDI on Rentals and Wages inSingapore 1 66

H E A D L I N E S The Myth of Asia's Miracle 169

3 Gains from Labor and Capital Flows 169Gains from Immigration 170

S I D E B A R Immigrants and Their Remittances 173

A P P L I C A T I O N Gains from Migration 174

S I D E BAR How Large Are Moving Costs? 175

Gains from Foreign Direct Investment 1 77

H E A D L I N E S Labor Migration in the Expanded European Union 178

4 Conclusions 179

Key Points, Key Terms, and Problems

CHAPTER 6 Increasing Returns to Scale and Imperfect PART 3Competition 185 New Explanations

1 Basics of Imperfect Competition 189 for InternationalKA i c • -u• i on TradeMonopoly bqui ibrium I ovDemand with Duopoly 190

2 Trade under Monopolistic Competition 191

Equilibrium without Trade 1 93

Equilibrium with Free Trade 1 95

3 Empirical Applications of Monopolistic Competition and Trade 199

Gains and Adjustment Costs for Canada under NAFTA 199

H E A D L I N E S What Happened When Two Countries Liberalized Trade?Pain, Then Gain 200

Gains and Adjustment Costs for Mexico under NAFTA 201

Gains and Adjustment Costs for the United States under NAFTA 205

Another Application: Intra-lndustry Trade 208

The Gravity Equation 209

A P P L I C A T I O N The Gravity Equation for Canada and the UnitedStates 212

4 Imperfect Competition with Homogeneous Products:The Case of Dumping 215A Model of Product Dumping 215

Numerical Example of Dumping 21 8

Reciprocal Dumping 218 ^

Numerical Example of Reciprocal Dumping 219

5 Conclusions 222


XIV CONTENTS

CHAPTER 7 Foreign Outsourcing of Goods and Services 227A P P L I C A T I O N Is Trade Today Different from the Past? 229

S I D E BAR Outsourcing versus Offshoring 230

1 A Model of Outsourcing 232Value Chain of Activities 233Changing the Costs of Trade 235A P P L I C A T I O N Change in Relative Wages across Countries 238Change in Relative Wages in the United States 238Change in Relative Wages in Mexico 244

2 The Gains from Outsourcing 245Simplified Outsourcing Model 246Production in the Absence of Outsourcing 248Terms of Trade 251A P P L I C A T I O N U.S. Terms of Trade and Service Exports 254

H E A D L I N E S Soccer, Samba and Outsourcing? 257A P P L I C A T I O N Impact of Outsourcing on U.S. Productivity 258

3 Outsourcing in Services 259The Logic of Service Outsourcing 259The Future of U.S. Comparative Advantage 261

S I D E BAR Outsourcing Microsoft Windows 261

4 Conclusions 263H E A D L I N E S Pomp and Circumspect 264


4 CHAPTER 8 Import Tariffs and Quotas under Perfect

International Trade Competition 271

1 A Brief History of the World Trade Organization 273S I D E BAR Key Provisions of the GATT 275

2 Gains from Trade 276Consumer and Producer Surplus 276

I Home Welfare 277Home Import Demand Curve 279

3 Import Tariffs for a Small Country 281Free Trade for a Small Country 281Effect of the Tariff 281Why Are Tariffs Used? 285

S I D E BAR Globalization and Developing Countries—A Shrinking TaxBase? 285

CONTENTS XV

A P P L I C A T I O N U.S. Tariffs on Steel 286H E A D L I N E S Europe's Little List: Apples, Tractors, and Toilet Paper 290

4 Import Tariffs for a Large Country 290Foreign Export Supply 291Effect of the Tariff 292A P P L I C A T I O N U.S. Tariffs on Steel Once Again 294

5 Import Quotas 298Import Quota in a Small country 298

H E A D L I N E S Europe Reaches Deal on Banana Imports 299H E A D L I N E S SweefOpportunity 299

A P P L I C A T I O N Auctioning Import Quotas in Australia andNew Zealand 302A P P L I C A T I O N China and the Multifibre Arrangement 304


CHAPTER 9 Import Tariffs and Quotas under ImperfectCompetition 313

1 Tariffs and Quotas with Home Monopoly 315No-Trade Equilibrium 31 5Free-Trade Equilibrium 316Effect of a Home Tariff 31 8Effect of a Home Quota 320A P P L I C A T I O N U.S. Imports of Japanese Automobiles 322

2 Infant Industry Protection 325Free-Trade Equilibrium 327

Tariff Equilibrium 328

A P P L I C A T I O N Examples of Infant Industry Protection 329Protecting the Automobile Industry in China 329

H E A D L I N E S Thanks to Detroit, China Is Poised,to Lead 333Computers in Brazil 334U.S. Tariff on Heavyweight Motorcycles 336

3 Tariffs with Foreign Monopoly 340Foreign Monopoly 340 ^A P P L I C A T I O N Import Tariffs on Japanese Trucks 342

4 Policy Response to Dumping 343Antidumping and Countervailing Duties 344A P P L I C A T I O N Antidumpinq/Countervailinq Duties versus SafequardTariffs 346

XVI CONTENTS

5 Conclusions 348H E A D L I N E S U.S. to Impose New Duties on Chinese Goods 349


CHAPTER 10 Export Subsidies in Agriculture and High-TechnologyIndustries 355

1 WTO Goals on Agricultural Export Subsidies 356Agricultural Export Subsidies 357Other Matters from the Hong Kong WTO Meeting 359

H E A D L I N E S Brazil Wins Rulings on 2 Trade Issues 359

2 Agricultural Export Subsidies in a Small Home Country 360Impact of an Export Subsidy 361

3 Agricultural Export Subsidies in a Large Home Country 363Effect of the Subsidy 363A P P L I C A T I O N Who Gains and Who Loses? 366

4 Agricultural Production Subsidies 368H E A D L I N E S Advertisement from UN Agencies 369H E A D L I N E S We Are Solely Concerned for Needs of Poor andHungry 369

Effect of a Production Subsidy in a Small Home Country 370Effect of the Production Subsidy in a Large Home Country 372

5 High-Technology Export Subsidies 373"Strategic" Use of High-Tech Export Subsidies 373Effect of a Subsidy to Airbus 377

H E A D L I N E S Airbus, China and Quid Pro Quo 377Subsidy with Cost Advantage for Boeing 379Best Strategy for Boeing 381A P P L I C A T I O N Subsidies to Commercial Aircraft 382

6 Conclusions 385H E A D L I N E S Airbus in a Spin as Investors Punish Delays 386


CHAPTER 11 International Agreements: Trade, Labor, and theEnvironment 391 '

1 International Trade Agreements 393The Logic of Multilateral Trade Agreements 394Regional Trade Agreements 398Trade Creation and Trade Diversion 399

CDNTENTS XVII

Numerical Example of Trade Creation and Diversion 400H E A D L I N E S A Korean-American Strand Enters Trade's SpaghettiBowl 401

Trade Diversion in a Graph 402A P P L I C A T I O N Trade Creation and Diversion for Canada 405

2 International Agreements on Labor Issues 406Labor Side Agreement under NAFTA 407Other Labor Agreements 407

H E A D L I N E S Nike Reveals Overseas Supply Chain 410

3 International Agreements on the Environment? 412Environmental Issues in the.GATT and WTO 41 2Does Trade Help or Harm the Environment? 416

H E A D L I N E S The Power of Big Corn 417The Tragedy of the Commons 418

H E A D L I N E S Ban on Caspian Sea Caviar Exports .420International Agreements on Pollution 422A P P L I C A T I O N The Kyoto Protocol 425

H E A D L I N E S Fixing Kyoto—A Global Superfund 427


CHAPTER 12 The Global Macroeconomy 433 PART 5

1 Foreign Exchange: Of Currencies and Crises 434 Introduction tou C L D ^ D L Aiz I n t e r n a t i o n a lHow exchange Rates Behave 435 . .\A/U c L D i /VA «. / u MacroeconomicsWhy Exchange Rates Matter 436When Exchange Rates Misbehave 438

H E A D L I N E S Economic Crisis in Argentina 440Summary 441

2 Globalization of Finance: Of Debts and Deficits 442Deficits and Surpluses: The Balance of Payments 442Debtors and Creditors: External Wealth 445Darlings and Deadbeats: Defaults and Other Risks 446Summary 448

3 Government and Institutions: Of Policies and Performance 449Integration and Capital Controls: The Regulation of InternationalFinance 450Independence and Monetary Policy: The Choice of ExchangeRate Regimes 451Institutions and Economic Performance: The Quality of Governance 453

XVIII CONTENTS

Summary 455H E A D L I N E S The Wealth of Nations 456


PART 6' CHAPTER 13 Introduction to Exchange Rates and the Foreign

Exchange Rates Exchange Market 461

1 Exchange Rate Essentials 462Defining the Exchange Rate 462Appreciations and Depreciations 464Multilateral Exchange Rates 466

Example: Using Exchange Rates to Compare Prices in a CommonCurrency 467

H E A D L I N E S By How Much Has the Dollar Fallen? 468

2 Exchange Rates in Practice 470Exchange Rate Regimes: Fixed versus Floating 471A P P L I C A T I O N Recent Exchange Rate Experiences 471

S I D E BAR Currency Unions and Dollarization 477

3 The Market for Foreign Exchange 477The Spot Contract 478Transaction Costs 478Derivatives 479A P P L I C A T I O N Foreign Exchange Derivatives 479Private Actors 480Government Actions 481

4 Arbitrage and Spot Exchange Rates 483Cross Rates and Vehicle Currencies 485

5 Arbitrage and Interest Rates 486Riskless Arbitrage: Covered Interest Parity 487A P P L I C A T I O N Evidence on Covered Interest Parity 489Risky Arbitrage: Uncovered Interest Parity 490

J. S I D E BAR Assets and Their Attributes 491y

ft . A P P L I C A T I O N Evidence on Uncovered Interest Parity 493•> Uncovered Interest Parity: A Useful Approximation 494

Summary 496


CONTENTS XIX

CHAPTER 14 Exchange Rates I: The Monetary Approach in theLong Run 501

1 Exchange Rates and Prices in the Long Run: Purchasing Power Parityand Goods Market Equilibrium 502The Law of One Price 503Purchasing Power Parity 504The Real Exchange Rate 505Absolute PPP and the Real Exchange Rate 506Absolute PPP, Prices, and the Nominal Exchange Rate 506Relative PPP, Inflation, and Exchange Rate Depreciation 506Summary 508A P P L I C A T I O N Evidence for PPP in the Long Run and Short Run 508How Slow is Convergence to PPP? 509

S I D E B A R Forecasting When the Real Exchange Rate Is Undervalued orOvervalued 510

What Explains Deviations from PPP? 51 1H E A D L I N E S The Big Mac Index 512

2 Money, Prices, and Exchange Rates in the Long Run: Money MarketEquilibrium in a Simple Model 514What is Money? 514The Measurement of Money 51 5The Supply of Money 516The Demand for Money: A Simple Model 516Equilibrium in the Money Market 51 7A Simple Monetary Model of Prices 51 8A Simple Monetary Model of the Exchange Rate 519Money Growth, Inflation, and Depreciation 519

3 The Monetary Approach: Implications and Evidence 521Exchange Rate Forecasts Using the Simple Model 521A P P L I C A T I O N Evidence for the Monetary Approach 524A P P L I C A T I O N Hyperinflations of the Twentieth Century 525

S I D E B A R Currency Reform 527H E A D L I N E S The First Hyperinflation of the Twenty-First Century 529

4 Money, Interest, and Prices in the Long Run: A General Model 530The Demand for Money: The General Model 530Long-Run Equilibrium in the Money Market 531 ^Inflation and Interest Rates in the Long Run 532The Fisher Effect 533Real Interest Parity 533A P P L I C A T I O N Evidence on the Fisher Effect 534

XX CONTENTS

The Fundamental Equation under the General Model 536Exchange Rate Forecasts Using the General Model 536

5 Monetary Regimes and Exchange Rate Regimes 539The Long Run: The Nominal Anchor 540

S I D E BAR Nominal Anchors in Theory and Practice 542


CHAPTER 15 Exchange Rates II: The Asset Approach in theShort Run 549

1 Exchange Rates and Interest Rates in the Short Run: UIP and FXMarket Equilibrium 550Risky Arbitrage 550Equilibrium in the FX Market: An Example 552Adjustment to FX Market Equilibrium 554Changes in Domestic and Foreign Returns and FX Market Equilibrium 554Summary 556

2 Interest Rates in the Short Run: Money Market Equilibrium 556

Money Market Equilibrium in the Short Run: How Nominal Interest RatesAre Determined 557Money Market Equilibrium in the Short Run: Graphical Solution 558Adjustment to Money Market Equilibrium in the Short Run 559Another Building Block: Short-Run Money Market Equilibrium 559Changes in Money Supply and the Nominal Interest Rate 560Changes in Real Income and the Nominal Interest Rate 561The Monetary Model: The Short Run versus the Long Run 561

3 The Asset Approach: Applications and Evidence 562The Asset Approach to Exchange Rates: Graphical Solution 562Short-Run Policy Analysis 565A P P L I C A T I O N The Rise and Fall of the Dollar, 1999-2004 567

4 A Complete Theory: Unifying the Monetary and AssetApproaches 569

S I D E BAR Confessions of a Forex Trader 571Long-Run Policy Analysis 572 *Overshooting 576A P P L I C A T I O N Bernanke's Bold Move 577

S I D E BAR Overshooting in Practice 578

CONTENTS XXI

5 Fixed Exchange Rates and the Trilemma 580What Is a Fixed Exchange Rate Regime? 581

Pegging Sacrifices Monetary Policy Autonomy in the Short Run:Example 581

Pegging Sacrifices Monetary Policy Autonomy in the Long Run:Example 583The Trilemma 585A P P L I C A T I O N The Trilemma in Europe 586

S I D E B A R Intermediate Regimes 587

6 Conclusions 587A P P L I C A T I O N News "and the Foreign Exchange Market inWartime 589Key Points, Key Terms, and Problems

CHAPTER 16 National and International Accounts: Income, Wealth, TL „ { rand the Balance of Payments 597 The Balance ot

Payments1 Measuring Macroeconomic Activity: An Overview 598

The Flow of Payments in a Closed Economy: Introducing the National Incomeand Product Accounts 599The Flow of Payments in an Open Economy: Incorporating the Balance ofPayments Accounts 601Summary 604

2 National Accounts: Product, Expenditure, and Income 605Three Approaches 605From GNE to GDP: Accounting for Trade in Goods and Services 605

H E A D L I N E S Who Makes the iPod? 607From GDP to GNI: Accounting for Trade in Factor Services 608A P P L I C A T I O N Celtic Tiger or Tortoise? 609From GNI to GNDI: Accounting for Transfers of Income 61 1What the National Economic Aggregates Tell Us 61 3

H E A D L I N E S Are Rich Countries "Stingy" with Foreign Aid? 614Understanding the Data for the National Economic Aggregates 615What the Current Account Tells Us 61 7A P P L I C A T I O N Global Imbalances 618

3 Balance of Payments Accounts: International Transactions 624Accounting for Asset Transactions 624 vAccounting for Home and Foreign Assets 626How the Balance of Payments Accounts Work 626Understanding the Data for the Balance of Payments Account 631What the Balance of Payments Account Tells Us 635

XXII CONTENTS

4 External Wealth 635The Level of External Wealth 636Changes in External Wealth 636

S I D E BAR The Nokia Economy 638Understanding the Data on External Wealth 639What External Wealth Tells Us 642

5 Conclusions 643H E A D L I N E S Lies, Damned Lies . . . 643

Key Points;- Key Terms, and Problems

Appendix to Chapter 16: External Wealth and Total Wealth 649

CHAPTER 17 Balance of Payments I: The Gains from FinancialGlobalization 651

1 Intertemporal Macroeconomics 653The Long-Run Budget Constraint 654A Long-Run Example: The Perpetual Loan 658Implications of the LRBC for Gross National Expenditure and Gross DomesticProduct 658Summary 659A P P L I C A T I O N The Favorable Situation of the United States 659A P P L I C A T I O N The Difficult Situation of the Emerging Markets 662

2 Gains from Consumption Smoothing 665The Basic Model 665Consumption Smoothing: A Numerical Example and Generalization 666Summary: Save for a Rainy Day 670

S I D E BAR Wars and the Current Account 670A P P L I C A T I O N Consumption Volatility and Financial Openness 671A P P L I C A T I O N Precautionary Saving, Reserves, and Sovereign WealthFunds 672

H E A D L I N E S Copper-Bottomed Insurance 674H E A D L I N E S The Next Globalization Backlash? 674

3 Gains from Efficient Investment 675The Basic Model 675Efficient Investment: A Numerical Example and Generalization 675Summary: Make Hay while the Sun Shines 679A P P L I C A T I O N Delinking Saving from Investment 679Can Poor Countries Gain from Financial Globalization? 681A P P L I C A T I O N A versus k 686

S I D E BAR What Does the World Bank Do? 690H E A D L I N E S A Brief History of Foreign Aid 691

CONTENTS XXIII

4 Gains from Diversification of Risk 6 9 2

Diversification: A Numerical Example and Generalization 692

A P P L I C A T I O N The Home Bias Puzzle 698

Summary: Don't Put All Your Eggs in One Basket 700

5 Conclusions 702


Appendix to Chapter 17: Common versus IdiosyncraticShocks 707

CHAPTER 18 Balance of Payments II: Output, Exchange Rates,and Macroeconomic Policies in the Short Run 709

1 Demand in the Open Economy 710Preliminaries and Assumptions 711

Consumption 71 1

Investment 71 3

The Government 713

The Trade Balance 714

H E A D L I N E S Soaring Loonie Drives Canadian Shoppers South 716

A P P L I C A T I O N The Trade Balance and the Real Exchange Rate 718

S I D E B A R Barriers to Expenditure Switching: Pass-Through andthe J Curve 719

Exogenous Changes in Demand 722

2 Goods Market Equilibrium: The Keynesian Cross 7 2 3

Supply and Demand 723

Determinants of Demand 724

Factors That Shift the Demand Curve 726

H E A D L I N E S Expenditure Switching and the Dollar Devaluation 7 2 7

Summary 727

3 Goods and Forex Market Equilibria: Deriving the IS Curve 7 2 8

Equilibrium in Two Markets 728

Forex Market Recap 728

Deriving the IS Curve 730

Factors That Shift the IS Curve 731

Summing Up the IS Curve 733

4 Money Market Equilibrium: Deriving the LM Curve 734 v

Money Market Recap 734

Deriving the LM Curve 736

Factors That Shift the LM Curve 736

Summing Up the LM Curve 737

XXIV CONTENTS

5 The Short-Run IS-LM-FX Model of an Open Economy 738Macroeconomic Policies in the Short Run 739Monetary Policy under Floating Exchange Rates 740Monetary Policy under Fixed Exchange Rates 741Fiscal Policy under Floating Exchange Rates 742Fiscal Policy under Fixed Exchange Rates 744Summary 745A P P L I C A T I O N The Rise and Fall of the Dollar in the 1980s 746

6 Stabilization Policy 749A P P L I C A T I O N Australia, New Zealand, and the Asian Crisisof 1997 749Problems in Policy Design and Implementation 752

7 Conclusions 754


Appendix 1 to Chapter 18: The Marshall-Lerner Condition 759

Appendix 2 to Chapter 18: Multilateral Real Exchange Rates 761

PART g CHAPTER 19 Fixed versus Floating: International Monetary

Applications and Experience 763I

1 Exchange Rate Regime Choice: Key Issues 765A P P L I C A T I O N Britain and Europe: The Big Issues 765Key Factors in Exchange Rate Regime Choice: Integration andSimilarity 771Economic Integration and the Gains in Efficiency 771Economic Similarity and the Costs of Asymmetric Shocks 772Simple Criteria for a Fixed Exchange Rate 772A P P L I C A T I O N Do Fixed Exchange Rates Promote Trade? 774

A P P L I C A T I O N Do Fixed Exchanqe Rates Diminish Monetary Autonomyand Stability? 777

2 Other Benefits of Fixing 780\ Fiscal Discipline, Seigniorage, and Inflation 780

^ • S I D E BAR The Inflation Tax 782Liability Dollarization, National Wealth, and ContractionaryDepreciations 782

H E A D L I N E S The Last Temptation? 789Summary 790

3 Fixed Exchange Rate Systems 791Cooperative and Noncooperative Adjustments to Interest Rates 792

CONTENTS XXV

Cooperative and Noncooperative Adjustments to Exchange Rates 794A P P L I C A T I O N The Gold Standard 797

4 International Monetary Experience 800The Rise and Fall of the Gold Standard 800Bretton Woods to the Present 804


CHAPTER 20 Exchange Rate Crises: How Pegs Work and HowThey Break 811

1 Facts about Exchange Rate Crises 812What Is An Exchange Rate Crisis? 812

How Costly Are Exchange Rate Crises? 81 3

S I D E B A R The Political Costs of Crises 815

Summary 817

2 How Pegs Work: The Mechanics of a Fixed Exchange Rate 817Preliminaries and Assumptions 817The Central Bank Balance Sheet 81 8Fixing, Floating, and the Role of Reserves 820How Reserves Adjust to Maintain the Peg 820Graphical Analysis of the Central Bank Balance Sheet 821Defending the Peg I: Changes in the Level of Money Demand 823A P P L I C A T I O N Risk Premiums in Advanced and Emerging Markets 826A P P L I C A T I O N The Argentine Convertibility Plan before the TequilaCrisis 830Defending the Peg II: Changes in the Composition of Money Supply 832A P P L I C A T I O N The Argentine Convertibility Plan after the TequilaCrisis 838The Central Bank Balance Sheet and the Financial System 839

S I D E BAR The Great Reserve Accumulation in Emerging Markets 842H E A D L I N E S Too Much of a Good Thing? 844

Summary 844

3 How Pegs Break I: Inconsistent Fiscal Policies 846The Basic Problem: Fiscal Dominance 846A Simple Model 846A P P L I C A T I O N The Peruvian Crisis of 1986 851Summary 854

4 How Pegs Break II: Contingent Monetary Policies 854The Basic Problem: Contingent Commitment 855

XXVI CONTENTS

A Simple Model 856A P P L I C A T I O N The Man Who Broke the Bank of England 861Summary 862

5 Conclusions 863Can We Prevent Crises? 863


CHAPTER 21 The Euro 8 6 9

1 The Economics" of the Euro 872The Theory of Optimum Currency Areas 872Simple Optimum Currency Area Criteria 873What's the Difference between a Fix and a Currency Union? 874Other Optimum Currency Area Criteria 875A P P L I C A T I O N Optimum Currency Areas: Europe versus the UnitedStates 878Are the OCA Criteria Self-Fulfilling? 882

H E A D L I N E S Currency Unions and Trade 884Summary 885

2 The History and Politics of the Euro 885A Brief History of Europe 885Summary 893

3 The ECB and the Eurozone in Theory and Practice 893The European Central Bank 893

H E A D L I N E S The ECB Is from Mars, the Fed Is from Venus 896The Rules of the Club 898Sticking to the Rules 902

4 Conclusions: Assessing the Euro 903H E A D L I N E S Whither the Euro? 907


CHAPTER 22 Topics in International Macroeconomics 911

1 Exchange Rates in the Long Run: Deviations from Purchasing PowerParity 912Limits to Arbitrage 913 \A P P L I C A T I O N It's Not Just the Burgers That Are Cheap 916Nontraded Goods and the Balassa-Samuelson Model 917Overvaluations, Undervaluations, and Productivity Growth: ForecastingImplications for Real and Nominal Exchange Rates 919

CONTENTS XXVII

A P P L I C A T I O N Real Exchange Rates in Emerging Markets 922Conclusions 924

2 Exchange Rates in the Short Run: Deviations from Uncovered InterestParity 924

H E A D L I N E S Eastern Europe and the Euro 925A P P L I C A T I O N The Carry Trade 925

H E A D L I N E S Mrs. Watanabe's Hedge Fund 929A P P L I C A T I O N Peso Problems 930The Efficient Markets Hypothesis 932Limits to Arbitrage 935Conclusions 939

3 Global Imbalances 940Facts about Emerging Global Imbalances 940A Model of Saving and Investment in the World Economy 940A P P L I C A T I O N The Savings Glut 946Looking Backward: How We Got Here 947Looking Forward: What Next? 948

S I D E BAR Reserves and Global Imbalances 948Debtors, Creditors, and the Long-Run Budget Constraint 950Real Exchange Rates and Global Imbalances: Two Views 951Conclusions 954

4 Debt and Default 956A Few Peculiar Facts about Sovereign Debt 957A Model of Default, Part One: The Probability of Default 958A P P L I C A T I O N Is There Profit in Lending to Developing Countries? 964A Model of Default, Part Two: Loan Supply and Demand 965A P P L I C A T I O N The Costs of Default 968Conclusions 972A P P L I C A T I O N The Argentina Crisis of 2000-02 973

H E A D L I N E S Is the IMF "Pathetic"? 977Key Points, Key Terms, and Problems

INDEX 1-1

Documents

internationa economics - GBV · Effect of a Subsidy to Airbus 377 HEADLINES Airbus, China and Quid Pro Quo 377 Subsidy with Cost Advantage for Boeing 379 Best Strategy for Boeing