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Macalester College
Spring 2001
International Money and Finance
in Historical Perspective
(Economics 72)
Professor: Pete Ferderer
Time & Place: MWF 1:10­2:10, Carnegie 107
Office: 306 Carnegie
Office Phone: 696­6093
Home Phone: 229­0611
Web Page: www.macalester.edu/~ferderer/
Office Hours: MWF 2:30­3:30 & TU 10:00­12:00
E­mail: Ferderer@Macalester.edu
Money links countries. Its primary function is as an instrument of exchange.
Money provides a way of translating ideas into practice and of allocating
resources. The management of money is at a fundamental level concerned
with the flow of information. By itself, monetary exchange cannot produce
new ideas and technologies ­­ it is so to speak irrelevant to the heart of the
mechanism that drives economic development ­­ but it is a nerve center,
distributing ideas about how those technologies may be used. When it fails
to function properly, the course of development is impeded and the enrich­
ment of mankind halted.
­­ Harold James, 1996
Content: This course addresses the following questions: What determines the price at which
different currencies trade for one another? Should governments ``fix'' the exchange rate at a
particular level? If so, what level? What does the pursuit of external policy goals, such as fixed
exchange rates, imply about the ability of policy­makers to address internal goals (e.g., full­
employment and low inflation)? Why do nations have trade imbalances and what impact do they
have on the broader economy? What are the causes of the international financial crisis observed
in Latin America in 1994­95 and Asia in 1997­98? What role do international institutions, such
as the International Monetary Fund, play in the economic system? Is Europe an ``optimal
currency area''? What impact will the euro have on the dollar's role as a vehicle currency?
This course examines international finance from a historical perspective and emphasizes the
interplay between the ``rules of the game'' that govern the international financial system and
economic performance. This approach has several advantages. First, the important relationships
in international finance (e.g., the balance of payments, purchasing power parity, and interest rate
parity) are examined in several different historical settings, leading to a deeper understanding of
how they work. Second, the historical approach helps us to understand the endogenous nature of
institutions. It illuminates, for example, why the International Monetary Fund was created.
Finally, this approach sheds light on the role that international finance has played in the history
of the twentieth century. For example, it becomes clear how WWI, the interwar gold standard,
WWII, and monetary union in Europe are connected!
Expectations: I have four primary expectations for students. They should: a) attend all class
meetings and be punctual, b) live by the code of academic honesty, c) work hard and keep up

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with the reading assignments, d) engage the course as an ``active learner'' (e.g., question,
challenge, and stay involved.) I have six expectations for myself. I should: a) set high, yet
attainable, standards, b) be fair and objective in grading, c) know my stuff, d) provide organized
and stimulating lectures, e) promote class discussion that facilitates active learning, and d) be
available outside of class for consultation.
Prerequisites: Economics 41, 51 and 61 are all required for registration in this course. Students
who are currently enrolled in 41 or 61 can take this course only if they receive permission from
the instructor. This course builds on material covered in Introduction to International Economics
(21), but 21 is not a prerequisite.
Readings: There are three books for the course, all available at the Expanded Mind bookstore:
1) International Money and Finance, Sixth Edition, by Michael Melvin; 2) International Money,
Second Edition, by Paul De Grauwe; and 3) Globalizing Capital: A History of the International
Monetary System, Second Edition, by Barry Eichengreen. Students are expected to purchase a
ten week subscription to The Economist magazine ($18 per student). This will give you access
to their electronic archive of articles that appear on the reading list. All other readings (journal
articles, book chapters and cases) are available on either electronic reserve (ER), standard
reserve (SR), or through JSTOR.
Grades: Final grades are based on the following:
Activity Weight
Class Participation 20%
Problems 10%
First Exam 20%
First Essay 15%
Second Essay 15%
Term Paper 20%
Class participation entails answering and posing questions during class and contributing to case
studies. Student contributions to classroom discussion will be recorded each day. A two­page
outline of the paper, complete with the thesis question and a preliminary list of references, is due
on Monday, March 26. The final draft of the paper is due on Friday, May 4. No exceptions will
be granted for either deadline. Students are encouraged to work in groups of two.
Important Web Sites:
Organization Address (http://) Comments
NBER www.nber.org/ Penn World Tables
World Bank www.worldbank.org papers and data
Government Pubs www.gpo.ucop.edu/catalog/erp97.html Data!!!!!!
IMF www.imf.org/external/index.htm International
St. Louis Fed www.stls.frb.org/ FRED data base
Board of Governors www.bog.frb.fed.us/ Data
OECD www.oecdwash.org Intern. Econ. Org.
Bernkopf's Home Page www.patriot.net/users/bernkopf Central Bank Links
The Economist www.economist.com Data and Ideas

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Course Outline and Reading List
Week Topic and Readings
Monday Introduction
Jan. 29 The Economist, "One World?" 10/18/1997.
Fundamental Ideas and Relationships
Wednesday Exchange Rates and the FX Market
Jan 31 Melvin, M., Ch. 1.
New York Times, "Dollar Makes Canada Land of the Spree," 8/1/1999.
Friday Government Intervention in the FX Markets
Feb. 2 Melvin, M., Ch. 1.
The Economist, ``Getting out of a fix,'' 11/20/97.
New York Times, "Central Banks Move to Rescue an Ailing Euro," 9/23/2000.
Monday Balance of Payments Accounting
Feb. 5 Melvin, M., Ch. 2.
The Economist, Figures to Fret About," 7/11/98.
Higgins, M. and T. Klitgaard, ``Viewing the Current Account Deficit as a
Capital Inflow,'' Current Issues in Economics and Finance, Dec. 1998. (ER)
Wednesday Risk and Hedging
Feb. 7 Melvin, M., Ch. 4.
Friday Interest Rate Parity
Feb. 9 Melvin, M., Ch. 5
The Economist, "Mahathir, Soros and the Currency Markets," 9/27/1997.
Monday Case Study
Feb. 12 Rose, A. ``The European Currency Crisis of 1992." (Ruminator bookstore)
Wednesday Purchasing Power Parity
Feb. 14 Melvin, M., Ch. 8.
Friday Elasticities Approach to the Balance of Trade
Feb. 16 Melvin, M., C. 9 (pp. 145­157).
Monday Absorbtion Approach to the Balance of Trade
Feb. 19 Melvin, M., C. 9 (pp. 158­159).
Mankiw, G., Ch. 8. (SR)
The Economist, ``A Capital Competition,'' 11/5/98.
Wednesday Monetary Approach to the Balance of Payments
Feb. 21 Melvin, M., C. 9 (pp. 159­167).
The Economist, "Talk is Cheap (and so is the Dollar)," 9/21/1996.
The Economist, "Buy Hard: with a Vengeance," 8/26/1995.
Friday The International Mobility of Capital
Feb. 23 Melvin, M., Chs. 6 & 7.
The Economist, ``Capital goes Global,'' 10/25/97.
The Economist, "Stay­at­home Shareholders," 2/17/1996.

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Monday Review
Feb. 26
Wednesday Exam
Feb. 28
Evolution of the International Financial System
Fri. & Mon. The Classical Gold Standard: 1879­1914
Mar. 2 & 5 Eichengreen, B. Globalizing Capital, Ch. 2.
McKinnon, R., "The Rules of the Game: International Money in Historical
Perspective," Journal of Economic Literature, March 1993. (JSTOR)
Wednesday Post­war Floating & Hyperinflation: 1919­1926
Mar. 7 Eichengreen, Globalizing Capital, Ch. 3 (pp. 51­57).
Friday Case Study
Mar. 9 Rukstad, M., ``The United Kingdom and the Gold Standard: 1925." (SR)
Mon. & Wed. The Interwar Gold Standard: 1927­1939
Mar. 12 & 14 Eichengreen, B. Globalizing Capital, Ch. 3.
DeGrauwe, P., International Money, Ch. 1.
Bernanke, B., "The Macroeconomics of the Great Depression: A Comparative
Approach," JMC B, February 1995. (JSTOR)
Eichengreen, B. and J. Sachs, ``Exchange Rates and Economic Recovery in
the 1930s,'' Journal of Economic History, 45 (1985). (JSTOR)
Nurske, R. The Gold Exchange Standard, 1944. (ER)
Friday Case Study
March 16 Carlson, J., ``Negotiations Prior to 1944 Bretton Woods Conference." (ER)
Monday The N­1 and Adjustment Problems
March 26 DeGrauwe, P., Chs. 2 and 3.
Wednesday Operation of Bretton Woods: 1945­1971
March 28 Eichengreen, B. Globalizing Capital, Ch. 4.
Friday Case Study
March 30 Rukstad, M. "Nixon's New Economic Policy: 1971." (SR)
The Post­1971 Floating­Rate Dollar Standard
Monday Overview
April 2 DeGrauwe, Paul, International Money, Ch. 5 (pp. 85­89)
Eichengreen, B. Globalizing Capital, Ch. 5 (pp. 136­52).
Wed. & Fri. Exchange Rate Models
April 4 & 6 Melvin, M., Ch. 10.
Taylor, M., ``The Economics of Exchange Rates,'' JEL, March 1995. (JSTOR)
DeGrauwe, Paul, International Money, Chs. 6 &7.
The Economist, ``Why Currencies Overshoot,'' 12/1/90.
Monday Central Bank Interventions
April 9 DeGrauwe, Paul, International Money, Ch. 10.

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Wednesday Case Study
April 16 Klein, M., ``Can this Currency be Saved?'' (Ruminator bookstore)
Friday Good Friday (no class)
April 13
Monday Vehicle Currencies
April 16 Melvin, M., Ch. 3 (pp. 59­64).
Krugman, P., ``The International Role of the Dollar: Theory and Prospect,'' in
Currencies in Crisis, 1992. (ER)
Exchange Rate Crises
Wednesday Theories of Speculative Attacks
April 18 DeGrauwe, Paul, International Money, Ch. 4.
Friday Europe 1992­93
April 20 Whitt, J., ``Monetary Union in Europe,'' Federal Reserve Bank of Atlanta
Economic Review, January 1994. (ER)
DeGrauwe, P., Ch. 3 (pp. 39­44).
Monday Mexico and the Tequila Crisis: 1994
April 23 Espinosa and Russell, ``The Mexican Economic Crisis: Alternative Views,''
Federal Reserve Bank of Atlanta Economic Review, January 1996. (ER)
The Economist, ``Too Little, Not Too Much,'' 6/24/95.
Wednesday Asia and the Emerging Markets: 1997
April 25 The Economist, ``Emerging Asia's Sombre Era,'' 8/24/96.
The Economist, ``Why Did Asia Crash?'' 1/10/98.
The Economist, ``Are Crashes Catching?'' 8/3/96.
The Search for New Rules
Friday Optimal Currency Areas and the Euro
April 27 Krugman & Obstfeld, International Economics, Ch. 20. (ER)
Eichengreen, B. Globalizing Capital, Chs. 5, 160­186.
The Economist, ``The Etiquette of Merging Currencies,'' 12/9/95.
The Economist, ``Euro Brief,'' 10/17/98­12/5/98.
Monday Capital Controls
April 30 Neely, C., "An Introduction to Capital Controls," FRB of St. Louis Review,
Nov/Dec. 1999. (ER)
Wednesday Currency Boards and Dollarization: The Answer?
May 2 The Economist, ``The ABCs of a Currency Board,'' 11/1/97.
The Economist, ``Argentina's Currency Strengths,'' 1/14/95.
Chang, R. "Dollarization: A Scorecard," FRB of Atlanta Economic Review Third
Quarter 2000. (ER)
The Economist, ``One World, One Money,'' 9/26/1998.
Fri. & Mon. Term Paper Presentations
May 4 & 7