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Foundations of International Macroeconomics

by Maurice Obstfeld and Kenneth S Rogoff The MIT Press
Pub Date:
Hbk 830 pages
AU$239.00 NZ$246.96
Product Status: Not Our Publication - we no longer distribute
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& Academics:
This large book is an innovative text that offers the first integrative modern treatment of the core issues in open economy macroeconomics and finance. With its clear and accessible style, it is suitable for first-year graduate macroeconomics courses as well as graduate courses in international macroeconomics and finance. Each chapter incorporates an extensive and eclectic array of empirical evidence. For the beginning student, these examples provide motivation and aid in understanding the practical value of the economic models developed. For advanced researchers, they highlight key insights and conundrums in the field.

Topic coverage includes intertemporal consumption and investment theory, government spending and budget deficits, finance theory and asset pricing, the implications of (and problems inherent in) international capital market integration, growth, inflation and seignorage, policy credibility, real and nominal exchange rate determination, and many interesting special topics such as speculative attacks, target exchange rate zones, and parallels between immigration and capital mobility.

Most main results are derived both for the small country and world economy cases. The first seven chapters cover models of the real economy, while the final three chapters incorporate the economy's monetary side, including an innovative approach to bridging the usual chasm between real and monetary models.

Foundations of International Macroeconomics provides the first integrative modern treatment of the core issues in international macroeconomics and finance. It can be used as a text for first-year graduate macroeconomics or for second-year graduate int ernational finance.

Solutions manual available.

'Maury Obstfeld and Ken Rogoff are among the very best international macroeconomists working today. They are the perfect people to write the book we badly need - a comprehensive, lucid treatment of the field that is neither sloppy nor doctrinaire, equipping its readers to understand both the broad areas of agreement among researchers and their important disputes. This book is ideal as a textbook, but it will also be a must-read for everyone in the field, no matter how senior. The chapters on sticky-price models, in particular, will, I predict, revolutionize the terms of the debate. A great achievement.' -- Paul Krugman, Professor of Economics, MIT, 'This amazingly comprehensive book provides a lucid explanation of modern macroeconomic theory and applies the theory to a wide range of international issues. For reference and classroom use, it sets a new standard in open economy macroeconomics. The use of boxes and applications in an advanced graduate text such as this is unorthodox, but extremely effective.' -- John Campbell, Professor of Applied Economics, Harvard University 'This is a landmark treatment of dynamic, open-economy macroeconomics -- the only kind that matters any more.' -- Paul Romer, Graduate School of Business, Stanford University

Table of Contents
1 Intertemporal Trade and the Current Account Balance

1.1 A Small Two-Period Endowment Economy Application: Consumption Smoothing in the Second Millennium B.C.
1.2 The Role of Investment
Box 1.1 Nominal versus Real Current Accounts
1.3 A Two-Region World Economy
Application: War and the Current Account
Application: Investment Productivity and World Real Interest Rates in the 1980s
1.4 Taxation of Foreign Borrowing and Lending
1.5 International Labor Movements Application: Energy Prices, Global Saving, and Real Interest Rates
IA Stability and the Marshall-Lerner Condition

2 Dynamics of Small Open Economies
2.1 A Small Economy with Many Periods
Application: When Is a Country Bankrupt?
2.2 Dynamics of the Current Account
Box 2.1 Japan's 1923 Earthquake
2.3 A Stochastic Current Account Model
Application: Deaton's Paradox
Application: The Relative Impact of Productivity Shocks on Investment and the Current Account
2.4 Consumer Durables and the Current Account
2.5 Firms, the Labor Market, and Investment
2A Trend Productivity Growth, Saving, and Investment: A Detailed Example
2B Speculative Asset Price Bubbles, Ponzi Games, and Transversality Conditions

3 The Life Cycle, Tax Policy, and the Current Account
3. I Government Budget Policy in the Absence of Overlapping Generations
3.2 Government Budget Deficits in an Overlapping Generations Model
Box 3.1 Generational Accounting
Application: Do Government Budget Deficits Cause Current Account Deficits?
Application: Overlapping Generations and
Econometric Tests of the Euler Equation
3.3 Output Fluctuations, Demographics, and the Life Cycle
Application: How Are Saving and Growth Related?
3.4 Investment and Growth
Application: Feldstein and Horioka's Saving-Investment Puzzle
3.5 Aggregate and Intergenerational Gains from Trade
3.6 Public Debt and the World Interest Rate
Application: Government Debt and World Interest Rates since 1970
3.7 Integrating the Overlapping Generations and Representative-Consumer Models
3A Dynamic Inefficiency

4 The Real Exchange Rate and the Terms of Trade
4.1 International Price Levels and the Real Exchange Rate
4.2 The Price of Nontraded Goods with Mobile Capital
Box 4.1 Empirical Evidence on the Law of One Price
Application: Sectoral Productivity Differentials and the Relative Prices ofNontradables in Industrial Countries
Application: Productivity Growth and Real Exchange Rate
4.3 Consumption and Production in the Long Run
4.4 Consumption Dynamics, the Price Level, and the Real lnterest Rate
4.5 The Terms of Trade in a Dynamic Ricardian Model
Box 4.2 The Transfer Effect for Industrial Countries
4A Endogenous Labor Supply, Revisited
4B Costly Capital Mobility and Short-Run Relative Price Adjustment Exercises

5 Uncertainty and International Financial Markets
5.1 Trade across Random States of Nature: The Small-Country Case
Box 5.I Lloyd's of London and the Custom Market for Risks
5.2 A Global Model
Application: Comparing International Consumption and Output Correlations
Box 5.2 Are Markets More Complete Within Than Among Countries?
5.3 International Portfolio Diversification
Application: International Portfolio Diversification and the Home Bias Puzzle
5.4 Asset Pricing
Application: The Equity Premium Puzzle over the Very Long Run
Application: GDP-Linked Securities and Estimates of Vm
5.5 The Role of Nontradables
Application: Nontradability and International Consumption Correlations
Application: How Large Are the Gains from International Risk Sharing?
5.6 A Model of Intragenerational Risk Sharing
Box 5.3 A Test of Complete Markets Based on Consumption Divergence within Age Cohorts
5A Spanning and Completeness
5B Comparative Advantage, the Current Account, and Gross Asset Purchases: A Simple Example
5C An Infinite-Horizon Complete-Markets Model
5D Ongoing Securities Trade and Dynamic Consistency

6 Imperfections in International Capital Markets
6.1 Sovereign Risk
Box 6.1 Sovereign Immunity and Creditor Sanctions
Application: How Costly Is Exclusion from World Insurance Markets?
Application: How Have Prior Defaults Affected Countries' Borrowing Terms?
6.2 Sovereign Risk and Investment
Application: Debt Buybacks in Practice
6.3 Risk Sharing with Hidden Information
6.4. Moral Hazard in International Lending
Application: Financing Constraints and Investment
6A Recontracting Sovereign Debt Repayments
6B Risk Sharing with Default Risk and Saving

7 Global Linkages and Economic Growth
7.1 The Neoclassical Growth Model
Box 7.1 Capital-Output Ratios since World War II
7.2 International Convergence
Application: Productivity Convergence 1870-1979: The Baumol-De Long-Romer Debate
Application: Public Capital Accumulation and Convergence
7.3 Endogenous Growth
Application: Can Capital Deepening Be an Engine of Sustained High Growth Rates: Evidence from Fast-Growing East Asia
Application: Population Size and Growth
7.4 Stochastic Neoclassical Growth Models
7A Continuous-Time Growth Models as Limits of Discrete-Time Models
7B A Simple Stochastic Overlapping Generations Model with Two-Period Lives

8 Money and Exchange Rates under Flexible Prices
8.1 Assumptions on the Nature of Money
8.2 The Cagan Model of Money and Prices
Box 8.1 How Important Is Seignorage?
8.3 Monetary Exchange Rate Models with Maximizing Individuals
Application: Testing for Speculative Bubbles
8.4 Nominal Exchange Rate Regimes
Box 8.2 Growing Use of the Dollar Abroad
8.5 Target Zones for Exchange Rates
8.6 Speculative Attacks on a Target Zone
8.7 A Stochastic Global General Equilibrium Model with Nominal Assets
8A A Two-Country Cash-in-Advance Model
8B The Mechanics of Foreign-Exchange Intervention

9 Nominal Price Rigidities: Empirical Facts and Basic Open-Economy Models
9.1 Sticky Domestic Goods Prices and Exchange Rates
9.2 The Mundell-Fleming-Dornbusch Model
9.3 Empirical Evidence on Sticky-Price Exchange-Rate Models
9.4 Choice of the Exchange-Rate Regime
9.5 Models of Credibility in Monetary Policy
Application: Central Bank Independence and Inflation
Application: Openness and Inflation

10 Sticky-price Models of Output, the Exchange Rate, and the Current Account
10.1 A Two-Country General Equilibrium Model of International Monetary Policy Transmission
Box 10.1 More Empirical Evidence on Sticky Prices
Box 10.2 The Role of Imperfect Competition in Business Cycles
10.2 Imperfect Competition and Preset Prices for Nontradables: Overshooting Revisited
Application: Wealth Effects and the Real Exchange Rate
10.3 Government Spending and Productivity Shocks
10.4 Nominal Wage Rigidities
Application: Pricing to Market and Exchange-Rate Pass-Through

Supplements to Chapter 2
Methods of Intertemporal Optimization
A Model with Intertemporally Nonadditive Preferences
Solving Systems of Linear Difference Equations
Supplement to Chapter 5
Multiperiod Portfolio Selection
Supplement to Chapter 8
Continuous-Time Maximization and the Maximum Principle

Kenneth Rogoff is Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University and a Research Associate of the National Bureau of Economic Research.