AØKA08061U International Monetary Economics

After completion of the course, students should be able to

• describe how the foreign exchange market is organized and how trades take place in the market;
• describe the institutional features of the foreign exchange market products (spot and forward contracts) and be able to distinguish between speculation and arbitrage;
• describe and explain Covered Interest Rate Parity (CIP), Uncovered Interest Rate Parity (UIP), and Purchasing Power Parity (PPP) and be able to summarize the empirical evidence on these parity conditions;
• describe the main models of exchange rate determination (the Monetary approach to the exchange rate, Dornbusch overshooting model, the portfolio balance model and Lucas asset pricing model) and use these models to analyze the effects of monetary and fiscal policy on the exchange rate, and summarize the empirical evidence on these models;
• describe and use Mundell-Fleming models to analyze the effects of economic policy under both flexible and fixed exchange rates;
• explain and describe the main characteristics of the European Monetary Union;
• explain the theory of optimum currency area and apply this theory to the analysis of the European Monetary Union;
• describe, explain and compare first-, second- and third-generation models of currency crises and apply these models to analyze actual currency crises;
• continue to undertake further study of international finance with a high degree of autonomy.

The course provides students with competences that relate primarily to international financial management and international economic policy. For example how a financial manager or policymaker should use his/her knowledge of international financial markets to address questions such as: How to evaluate international projects and exploit differences in the cost of capital? How a policymaker should use his/her knowledge to answer questions such as: How are exchange rates determined and how do economic policy affect exchange rates? What are the main advantages/disadvantages of international cooperation such as the European Monetary Union? What explains why there are currency crises and how do we prevent future crises?