Preface ix
Part 1 Foundations 1
1 An Overview of the Book 3
1.1 What is International Macroeconomics? 4
1.2 The International Macroeconomics Toolkit 9
1.3 The Contents of this Book 10
1.4 Summary 15
2 Open-economy Macroeconomic Accounting 17
2.1 The Balance of Payments Accounts 18
2.2 Sub-accounts in the Balance of Payments 22
2.3 Basic BOP Facts for the United States 29
2.4 The NIPA in an Open Economy: Aggregate Identities 31
2.5 Sectoral Identities 37
2.6 Summary 41
3 Macroeconomic Influences on the Foreign Exchange Market 46
3.1 Exchange Rate Concepts 47
3.2 Supply and Demand for Foreign Exchange 50
3.3 Relative Prices of Domestic and Foreign Goods: The Real Exchange Rate 52
3.4 Relative Returns on Domestic and Foreign Assets: Interest Parity Conditions 63
3.5 Central Bank Intervention in the Foreign Exchange Market: Exchange Rate Regimes 70
3.6 Summary 77
Appendix 3.1 Properties of Logarithms 80
4 The Macroeconomic Framework 82
4.1 Production Structure and Economic Agents 84
4.2 Equilibrium in the Market for Financial Assets 85
4.3 Equilibrium in the Market for Domestic Goods 91
4.4 Equations and Unknowns: Imposing Additional Structure 100
4.5 Summary 108
Appendix 4.1 The Marshall–Lerner Condition 109
Appendix 4.2 The Framework in Log-Linear Form 110
Part 2 Fixed Exchange Rates 113
5 The Classical Gold Standard 115
5.1 Evolution of the International Gold Standard 116
5.2 Central Bank Behavior under the Gold Standard 120
5.3 Summary 127
6 Gold Standard Macroeconomics 129
6.1 Short-Run Macroeconomics under the Gold Standard 130
6.2 Short-Run Comparative Statics 139
6.3 The Long-run Model 145
6.4 The Gold Standard as an International Monetary System 148
6.5 Summary 155
Appendix 6.1 The Gold Standard with Zero Capital Mobility 157
7 The Bretton Woods System 159
7.1 Evolution of the Bretton Woods System 160
7.2 Modeling Soft Pegs with Imperfect Capital Mobility 164
7.3 The Bond Market Equilibrium (BB) Curve 167
7.4 Properties of the BB Curve 169
7.5 Summary 174
8 Macroeconomics under ‘‘Soft’’ Pegs and Imperfect Capital Mobility 177
8.1 Solving the Model 178
8.2 Comparative Statics 180
8.3 Bretton Woods as an International Monetary System 187
8.4 Summary 199
Appendix 8.1 Alternative Monetary Policy Regimes 202
9 Fixed Exchange Rates in a Financially Integrated World: Currency Crises and ‘‘Hard’’ Pegs 208
9.1 Soft Pegs with High Capital Mobility 209
9.2 Currency Crises 216
9.3 Financial Integration and Crises 219
9.4 Modern Versions of Hard Pegs 225
9.5 Soft Versus Hard Pegs: Some Policy Issues 228
9.6 Summary 233
Appendix 9.1 The Monetary Approach to the Balance of Payments (MABP) 236
Part 3 Floating Exchange Rates 239
10 Floating Exchange Rates I: Transitory Shocks 241
10.1 Analytical Framework 242
10.2 Solving the Floating Exchange Rate Model 245
10.3 Comparative Statics 252
10.4 Summary 265
Appendix 10.1 The Asset Market Approach to the Exchange Rate 268
Appendix 10.2 Algebraic Solution of the Log-linear Model 269
Appendix 10.3 Interest Rate Targeting under Floating Exchange Rates 270
11 Floating Exchange Rates II: Intermediate and Permanent Shocks 272
11.1 Anticipated Future Shocks 273
11.2 Multi-period Shocks 279
11.3 Permanent Shocks 284
11.4 Comparing Permanent and Transitory Shocks 291
11.5 Summary 296
12 Floating Exchange Rates III: Exchange Rate Dynamics 299
12.1 Asymmetric Adjustment in Goods and Asset Markets 300
12.2 The Dornbusch Overshooting Model 301
12.3 Comparative Statics 306
12.4 Generalizing the Model 310
12.5 Summary 315
Appendix 12.1 Proof that 317
13 Long-run Equilibrium under Floating Exchange Rates 319
13.1 A Long-run Model 320
13.2 Solving the Long-run Model 325
13.3 Comparative Statics 327
13.4 Comparing the Short-run and Long-run Responses to Permanent Shocks 331
13.5 The Role of Long-run Inflation 333
13.6 Summary 338
Appendix 13.1 The Long-run Floating Rate Model in Log-linear Form 340
Appendix 13.2 Fixed Exchange Rates in the Long Run 342
14 Floating Exchange Rates with Short-run Price Flexibility 346
14.1 A ‘‘Flexprice’’ Model 347
14.2 Real Exchange Rate Dynamics 348
14.3 The Monetary Approach to the Exchange Rate 353
14.4 Currency Crises Revisited 358
14.5 Gradual Price Adjustment 364
14.6 Summary 369
15 Choosing an Exchange Rate Regime 372
15.1 Optimality Criterion I: Minimizing the Costs of Making International Transactions 373
15.2 Optimality Criterion II: Long-run Inflation Stabilization 377
15.3 Optimality Criterion III: Short-run Macroeconomic Stability 382
15.4 Weighing Optimality Criteria 389
15.5 Summary 391
Part 4 International Monetary Cooperation 395
16 The International Financial Architecture 397
16.1 The International Monetary System after Bretton Woods 399
16.2 The International Debt Crisis 400
16.3 Changes in the International Macroeconomic Environment in the 1990s 404
16.4 Proposals for Reforming the International Financial Architecture 409
16.5 Summary 414
17 G-8 Policy Coordination 416
17.1 Why Coordinate? Theory 417
17.2 Comparative Statics 426
17.3 Post-Bretton Woods International Policy Coordination among the G-8 Countries 430
17.4 The US Current Account Deficit in the 2000s 435
17.5 Summary 438
18 Monetary Unification 441
18.1 Economic Integration in Western Europe 442
18.2 European Monetary Integration 446
18.3 Monetary Union in West Africa 453
18.4 The Eastern Caribbean Currency Union 457
18.5 Summary 460
Part 5 The New International Macroeconomics 465
19 Intertemporal Issues in International Macroeconomics 467
19.1 A Simple One-Good Model 468
19.2 A Two-Good Model 476
19.3 Introducing the Government 480
19.4 Summary 485
Index 487
Peter J. Montiel is the Farleigh S. Dickinson '41 Professor of Economics at Williams College, and received his PhD from MIT. He has served as a Senior Policy Advisor at the IMF as well as Chief of the Macroeconomics and Growth Division of the Policy Research Department of the World Bank, and has provided expert counsel to a variety of regional development banks and central banks. He is the author of several books, including Development Macroeconomics, 3rd edition (with Richard Agenor, 2008) and Macroeconomics in Emerging Markets (2nd edition forthcoming), and numerous articles on international macroeconomics.
"Montiel?s book is indispensable for anyone wishing to deepen their understanding of International Macroeconomics. It presents a much more realistic picture than what is provided by other textbooks." ?Rodolphe Desbordes, University of Strathclyde "This text's main strength is its unified approach, as it starts with a general model, and then considers special cases pertaining to particular countries, institutions, and historical time periods." ?Kenneth Kasa, Simon Fraser University "Montiel?s friendly style, clarity of exposition, and rigorous treatment of the international topics make this a strong textbook." ?David Shepherd, University of Westminster "This text?s exposition is very methodical, applying the method of comparative statics systematically for evaluating important contemporaneous policy issues as well as historical episodes." ?Watanabe Shinichi, International University of Japan
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