Course Outline: International Fiance

PhD course | Frankfurt University | Spring 2008 | version: March 2008

Outline and Schedule

I.  Exchange rate economics

  • Sarno, L. and M.P. Taylor. 2003. The Economics of Exchange Rates, Cambridge and New York: Cambridge University Press; chapters 2, 3, 4, 7.
  • Hallwood, C.P. and R. MacDonald. 2004. International Money and Finance, Blackwell Publishing, 3rd edition; chapters 7-13.

1. Empirical Models of Nominal Exchange Rates

  • Mark, N. 1995. Exchange Rates and Fundamentals: Evidence on long-horizon predictability. American Economic Review 85: 201-218.
  • Sarno, L. (2005), “Towards a Solution to the Puzzles in Exchange Rate Economics: Where Do We Stand?”, Canadian Journal of Economics, 38(3), 673-708 (Keynote speech at the 2004 Canadian Economic Association Annual Meetings, Toronto.)
  • Sarno, L. and Taylor, G. (2001), “Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?”, Journal of Economic Literature, 39(3), pp. 839-868.
  • Bacchetta P. and E. van Wincoop, “Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?”, NBER WP9498, Feb 2003
  • Meese R. and K. Rogoff, “Empirical Exchange Rate Models of the Seventies”, Journal of International Economics 14 3-24, 1983
  • Frankel, J. and Rose, A. (1995), “Empirical Research on Nominal Exchange Rates,” in Grossman, G.M. and Rogoff, K.H. (eds.), Handbook of International Economics, Vol. 3, Amsterdam, New York and Oxford: Elsevier, North-Holland.

2. Long Run Real Exchange Rates, Terms of Trade and Expenditure Switching.

  • Engel C. and J. Rogers, "How Wide is the Border?" American Economic Review 1996 Dec, pp1112-1125;
  • Imbs J, H. Mumtaz, M. Ravn and H. Rey, “PPP Strikes Back: Aggregation and the Real Exchange Rate”, QJE 2005
  • Rogoff K. "The Purchasing Power Parity Puzzle", Journal of Economic Literature Vol. 34, No. 2. (Jun., 1996), pp. 647-668;
  • Engel C. "Accounting for US Real Exchange Rate Changes," Journal of Political Economy 107(3), June 1999, pages 507-38;

3. Microstructure Models of FX Markets

  • Evans, M.D.D. and Lyons, R.K. (2002), “Order Flow and Exchange Rate Dynamics,” Journal of Political Economy, 110(1), pp. 170-180.
  • Evans, M.D.D. and Lyons, R.K. (2003), “How is Macro News Transmitted to Exchange Rates?”, NBER Working Paper No. 9433.
  • Evans, M.D.D. and Lyons, R.K. (2004), “Exchange Rate Fundamentals and Order Flow,” Georgetown University, University of California, Berkeley and NBER, mimeo. 

II.  International financial markets & integration

4. Capital Flows

  • Bekaert G., C. Harvey and C. Lundblat, “Does Financial Liberalization Spur Growth”, Duke University, May 2002.
  • Edison, H., M. Klein, L. Ricci and T. Sloek, “Capital Account Liberalization and Economic Performance: Survey and Synthesis”, NBER Working paper 9100, August 2002.
  • Gourinchas P-O and H. Rey, “International Financial Adjustment”, mimeo Princeton University 2004.
  • Lane P. and G. M. Milesi-Ferretti, "The External Wealth of Nations: Measure of Foreign Assets and Liabilities for Industrial and Developing Countries,"
  • Portes, R. and H. Rey (2005):”The determinants of cross-border equity flows”, Journal of International Economics 65, 269-96.
  • Brennan M. and H. Cao, 1997, “International portfolio investment flows”, Journal of Finance 52, 1851-1880.
  • Kraay, A., N. Loayza, L Servén and J. Venture (2005): “Country Portfolios”, Journal of the European Economic Association 3, 914-945.
  • Albuquerque, R., N. Loayza and L. Servén (2005): “World Market Integration Through the Lens of Foreign Direct Investors”, Journal of International Economics 66, 267-295.

5. Risk Sharing and International Financial Markets

  • Imbs, J. 2006. Real effect of financial integration. Journal of International Economics (also available via J. Imbs’ homepage)
  • Brandt M., Cochrane J. and P. Santa Clara, 2004. "International Risk Sharing is better than you think (or exchange rates are much too smooth) ", NBER WP 8404.
  • Van Wincoop, E,  "How Big are Potential Gains from International Risk Sharing?", Journal of International Economics 47, 1999, 109-135.
  • Cole H. and M. Obstfeld, " Commodity Trade and International Risk Sharing: How much do Financial Markets Matter?",  Journal of Monetary Economics 28 (August): 3-24, 1991.
  • Lucas R., "Interest Rates and Currency Prices in a Two-Country World", Journal of Monetary Economics, 10, 335-59, 1982.
  • Martin P. and H. Rey: "Financial Super-Markets: Size matters for asset trade".

6. International portfolio diversification in theory and practice

  • French, K. and J. Poterba (1991): “Investor diversification and international equity markets”, American Economic Association Papers and Proceedings 81, 222-226
  • Van Wincoop, E. (1999):”How big are the potential welfare gains from international risk sharing?”, Journal of International Economics 47, 109-135.
  • Ahearne, A., W. Griever and F. Warnock (2004): Information costs and home bias: an analysis of U.S. holdings of foreign equity”, Journal of International Economics 62, 313-336
  • Imbs, J. (2004):”The real effects of financial integration”, CEPR Discussion Paper 4335.
  • Pesenti, P. and E. van Wincoop (2002):”Can nontradables generate substantial home bias?”, Journal of Money, Credit and Banking 34(1), p. 25-50
  • Prasad, E., K. Rogoff, S. Wei and M. Kose (2004):”Financial Globalization, Growth and Volatility in Developing Countries”, NBER Working Paper 10942.

7. Equity and Bond Home Bias, and International CAPM

  • Lewis K., "International Home Bias in International Finance and Business Cycles", Journal of Economic Literature 37, June 1999, 571-608.
  • Dumas, B and B. Solnik, "The world price of foreign exchange risk", Journal of Finance, 1995,. Vol 50 (2) p 445-79.
  • Pavlova A and R. Rigobon, “Asset Prices and Exchange Rates”, mimeo Sloan School, 2005
  • Lewis K., "Puzzles in International Financial Markets" in Handbook of International Economics, Gene Grossman and Ken Rogoff, ed, North Holland, 1995 also NBER WP 4951;
  • Obstfeld M. and K. Rogoff, "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?", NBER Macro Annual 2000, also NBER working paper 7777.

8. Sovereign Debt

9. Financial and Currency Crises in Open Economies

  • Flood, R., and P. Garber. “Collapsing Exchange Rate Regimes: Some Linear Examples.” JIE
  • Kaminsky, G. and C. Reinhart, “The Twin Crises: the causes of banking and balance of payments problems.” AER 89, 1999, 473-500
  • Mc Kinnon, R., and H. Pill. 1996. “Credible Liberalizations and International Capital Flows: The Overborrowing Syndrome,” in T. Ito and A. Krueger (eds.), Financial Deregulation and Integration in East Asia, Chicago: Chicago University Press.
  • Chari, V.V. and P. Kehoe, “Hot Money,” JPE 111 (2003), 1262-92
  • Alesina, A., and G. Tabellini. "External Debt, Capital Flight, and Political Risk." JIE 27

10. Global Imbalances and Financial Integration

  • Blanchard O. and F. Giavazzi: "Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle?", Brookings Papers on Economic Activity, Fall 2002.
  • Backus, David, Espen Henriksen, Frederic Lambert, and Chris Telmer. 2005. Current Account Fact and Fiction. NBER Working Paper and mimeo NYU (see D. Backus homepage for latest version).
  • Gourinchas P-O. and O. Jeanne “On the Benefits of Capital Account Liberalization for Emerging Economies”.
  • Acemoglu D. and J. Ventura, “The World Income Distribution”, Quarterly Journal of Economics, May 2002.

11. Exchange rate regimes and monetary policy choices

  • Calvo, G. and C. Reinhard (2002):”Fear of floating”, Quarterly Journal of Economics 117(2), 379-407.
  • Hausmann, Ricardo, Michael Gavin, Carmen Pages, and Ernesto Stein. (1999). Financial Turmoil and the Choice of Exchange Rate Regime. Inter-American Development Bank, Research Department Working Paper No. 400.
  • Williamson, John. (2000). Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option. Institute for International Economics, Washington D.C.
  • Calvo, G. and R. Mishkin (2003): The mirage of exchange rate regimes for emerging market countries”, Journal of Economic Perspectives 17, 99-118.


This course develops core models of international finance, and surveys selected topics in international financial markets; exchange rates and purchasing power parity; international CAPM; equity and bond home biases; determinants of capital flows; sovereign debt crisis; speculative attacks and financial crises; contagion and financial linkages; exchange rate regimes and monetary policy choices; and the stability of the international financial system.

The goal is to provide a thorough foundation of the key concepts in international finance, with some of the topics also touching upon international macroeconomics and trade, while others are more finance focused. A closely related intention of the course is to give the students a good idea of the current frontier of research in selected areas of international finance, and thus ultimately to prepare them to do original work. The course assumes that students have taken the first-year macro, micro and econometrics sequences.

Requirements and grades

Students will be assessed on the basis of three elements; first, an essay/brief term paper (30%) and presentation thereof (20%) addressing a specific question/paper in an area of choice; second, an empirical exercise with data using an econometric software (30%); and third, class participation (20%).

Reading list

Readings for each topic provided below are preliminary. An updated and more detailed reading list, distinguishing between core/required readings (marked blue) and additional readings, will be provided at the beginning of the course. Students are expected to have at least browsed through the required readings before class.

Time and location

Mondays and Fridays from 12.00 – 14.00, starting from 31 March onwards for the first half of the semester.