This course provides an in-depth analysis of models of exchange rate determination. The course starts with a review of the basic relationships in currency markets, including covered and uncovered interest parities, and surveys recent evidence on deviations from these parity conditions. Monetary models of the nominal exchange rate are presented, followed by the Mundell-Fleming-Dornbusch model. We examine how speculation can lead to a currency crisis, both from a fundamental and a self-fulfilling perspective, drawing on historical and contemporary episodes. We then turn to microfounded models of the nominal exchange rate and discuss the exchange rate disconnect puzzle. The course concludes by addressing the economics of liquidity traps, secular stagnation, and selected frontier topics including dollar dominance and the digitalisation of money.

Upon completion of the subject, students will be able to: a) discuss the basic concepts of international finance. b) understand the main determinants of exchange rates. c) understand the basic concepts of international macro-finance models.

Foreign Exchange-Rate Markets • Federal Reserve Bank of New York (2010), Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. Covered Interest Rate Parity • OR: Chapter 8.7.5 Uncovered Interest Rate Parity • OR: Chapter 8.7.5 • Class Notes A Primer on Difference Equations • Sargent, Thomas (1987), Macroeconomic Theory, Chapter IX • Class Notes Monetary Model of the Nominal Exchange Rate • OR: Chapter 8.2 • Class Notes The Mundell-Fleming-Dornbusch Model • OR: Chapter 9.2 Speculative Attacks on Fixed-Exchange-Rate Regimes • OR: Chapter 8.4.2 Self-Fulfilling Currency Crises • OR: Chapter 9.5.4 Exchange-Rate Models with Microfoundations • OR: Chapter 8.3 Liquidity Traps • Krugman, P. R., Dominquez, K. M., & Rogoff, K.. (1998). It's Baaack: Japan's Slump and the Return of the Liquidity Trap. Brookings Papers on Economic Activity, 1998(2), 137–205. http://doi.org/10.2307/2534694 Secular Stagnation • Eggertsson, G, Neil R. Mehrota, Lawrence H. Summers (2016). Secular Stagnation in the Open Economy. NBER Working Paper No. 22172

Obstfeld, Maurice and Kenneth Rogoff (1996), Foundations of International Macroeconomics, The MIT Press. (OR) There is a course’s web page available at learn.luiss.it which contains updated information on the syllabus and course’s materials.

Lectures, Exercises, Readings and work with data.

Continuous assessment and final written exam

Strong interest in the topics developed in the course and in reading advanced scientific articles.