includes index

part 1 The Balance of Payments and Macroeconomic Policy in an Open Economy --
1 The Foreign Exchange Market 3 --
1.2 Exchange rate definitions 5 --
1.3 Characteristics and participants of the foreign exchange market 6 --
1.4 Arbitrage in the foreign exchange market 8 --
1.5 The spot and forward exchange rates 9 --
1.6 Nominal, real and effective exchange rates 9 --
1.7 A simple model of the determination of the spot exchange rate 13 --
1.8 Alternative exchange rate regimes 17 --
1.9 The determination of the forward exchange rate 20 --
1.10 The interaction of hedgers, arbitrageurs and speculators 24 --
2 The Balance of Payments 27 --
2.2 What is the balance of payments? 28 --
2.3 Collection, reporting and presentation of the balance of payments statistics 28 --
2.4 Balance of payments accounting and accounts 29 --
2.5 An overview of the sub-accounts in the balance of payments 30 --
2.6 Recording of transactions in the balance of payments 32 --
2.7 What is meant by a balance of payments surplus or deficit? 34 --
2.8 Alternative concepts of surplus and deficit 34 --
2.9 Do the record United States current account deficits matter? 36 --
2.10 Some open economy identities 42 --
2.11 Open economy multipliers 45 --
3 Elasticity and Absorption Approaches to the Balance of Payments 52 --
3.2 The elasticity approach to the balance of payments 53 --
3.3 Empirical evidence on import and export demand elasticities 56 --
3.4 The pass-through effect of a depreciation or appreciation 60 --
3.5 The absorption approach 61 --
3.6 The effects of a devaluation on national income 62 --
3.7 The effects of a devaluation on direct absorption 63 --
3.8 A synthesis of the elasticity and absorption approaches 66 --
4 Macroeconomic Policy in an Open Economy 69 --
4.2 The problem of internal and external balance 70 --
4.3 The Mundell-Fleming model 72 --
4.4 Derivation of the IS schedule for an open economy 73 --
4.5 Derivation of the LM schedule for an open economy 75 --
4.6 Derivation of the BP schedule for an open economy 76 --
4.7 Equilibrium of the model 79 --
4.8 Factors shifting the IS-LM-BP schedules 79 --
4.9 Internal and external balance 81 --
4.10 Internal and external balance under fixed exchange rates 84 --
4.11 Internal and external balance under floating exchange rates 85 --
4.12 A small open economy with perfect capital mobility 87 --
4.13 The principle of effective market classification 92 --
4.14 Limitations of the Mundell-Fleming model 95 --
5 The Monetary Approach to the Balance of Payments 98 --
5.2 A simple monetary model 99 --
5.3 The monetarist concept of a balance of payments disequilibrium 104 --
5.4 The effects of a devaluation 105 --
5.5 A monetary exchange rate equation 106 --
5.6 A money supply expansion under fixed exchange rates 108 --
5.7 A money supply expansion under floating exchange rates 110 --
5.8 The effects of an increase in income under fixed exchange rates 112 --
5.9 The effects of an increase in income under floating exchange rates 114 --
5.10 An increase in foreign prices under fixed exchange rates 115 --
5.11 An increase in foreign prices under floating exchange rates 116 --
5.12 Implications of the monetary approach 118 --
5.13 Empirical evidence on the monetary approach 119 --
5.14 Criticisms of the monetary approach 120 --
Part 2 Exchange Rate Determination: Theory, Evidence and Policy --
6 Purchasing Power Parity and Floating Exchange Rate Experience 125 --
6.2 Purchasing power parity theory and the law of one price 126 --
6.3 Absolute and relative PPP 126 --
6.4 A generalized version of PPP 128 --
6.5 Measurement problems in testing for PPP 129 --
6.6 Empirical evidence on PPP 130 --
6.7 Summary of empirical evidence on PPP 135 --
6.8 Explaining the poor performance of purchasing power parity theory 139 --
6.9 The Balassa-Samuelson model 141 --
6.10 Per capita income levels, the relative sizes of economies and the importance of PPP estimates 143 --
7 Modern Models of Exchange Rate Determination 147 --
7.2 Asset prices 148 --
7.3 Uncovered interest rate parity 149 --
7.4 The monetary models of exchange rate determination 152 --
7.5 The flexible-price monetary model 152 --
7.6 The Dornbusch sticky-price monetarist model 154 --
7.7 A simple explanation of the Dornbusch model 155 --
7.8 A formal explanation of the Dornbusch model 157 --
7.9 Derivation of the goods-market equilibrium schedule 158 --
7.10 Derivation of the money-market equilibrium schedule 159 --
7.11 A money supply expansion and exchange rate 'overshooting' 162 --
7.12 Importance of the sticky-price monetary model 163 --
7.13 The Frankel real interest rate differential model 164 --
7.14 Implications of the monetary views of exchange rate determination 166 --
7.15 Allowing for imperfect substitutability between domestic and foreign bonds 169 --
7.16 A synthesis portfolio balance model 172 --
7.17 The importance of the portfolio balance model 174 --
8 The Portfolio Balance Model 178 --
8.2 The concept of a risk premium 179 --
8.3 Different types of risk 181 --
8.4 A portfolio balance model 183 --
8.5 Derivation of the asset demand functions 186 --
8.6 Equilibrium of the model 187 --
8.7 The effects of a foreign exchange operation 188 --
8.8 The effects of an open market operation 189 --
8.9 The effects of a sterilized foreign exchange operation 190 --
8.10 A comparison of an FXO, OMO and SFXO 192 --
8.11 The dynamics of the model 193 --
8.12 The effects of a change in risk perceptions 194 --
8.13 Money versus bond-financed fiscal expansion 195 --
8.14 The risk premium, imperfect and perfect substitutability 198 --
9 Empirical Evidence on Exchange Rates 202 --
9.2 What is an efficient market? 203 --
9.3 Exchange market efficiency tests 204 --
9.4 Alternative tests of the efficient market hypothesis 209 --
9.5 Summary of findings on exchange market efficiency 210 --
9.6 Empirical tests of exchange rate models 211 --
9.7 Exchange rate models: a forecasting analysis 213 --
9.8 Explaining the poor results of exchange rate models 216 --
9.9 The 'news' approach to modelling exchange rates 218 --
9.10 The longer-run predictability of exchange rate movements 221 --
9.11 Modelling exchange rate expectations 225 --
9.12 Empirical tests of different expectations mechanisms 227 --
9.13 Alternative approaches to modelling exchange rates: the role of chartists and fundamentalists 228 --
10 Fixed, Floating and Managed Exchange Rates 235 --
10.2 The case for fixed exchange rates 236 --
10.3 The case for floating exchange rates 238 --
10.4 The modern evaluation of fixed and flexible exchange rate regimes 242 --
10.5 Specification of the objective function 242 --
10.6 The model 243 --
10.7 Determining equilibrium 245 --
10.8 Money demand shock 247 --
10.9 Aggregate demand shock 248 --
10.10 Aggregate supply shock 249 --
10.11 Managed floating 252 --
Part 3 The Postwar International Monetary System --
11 The International Monetary System 261 --
11.2 The Bretton Woods system 263 --
11.3 Features of the system 263 --
11.4 A brief history of the Bretton Woods system 265 --
11.5 Why did the Bretton Woods system break down? 268 --
11.6 The post-Bretton Woods era 273 --
11.7 The Jamaica Conference of 1976 277 --
11.8 The Snake and the EMS 278 --
11.9 The second oil shock 279 --
11.10 The dazzling dollar, 1980-85 279 --
11.11 From Plaza to Louvre and beyond 280 --
11.12 Currency turmoil and crises post-1990 281 --
11.13 The present exchange rate system 289 --
11.14 The bipolar view of the international monetary system: which exchange rate regime is best? 289 --
11.15 Reform of the international monetary system 295 --
11.16 The Williamson target zone proposal 295 --
11.17 The McKinnon global monetary target proposal 295 --
11.18 The Tobin foreign exchange tax proposal 296 --
11.19 Reform of the international financial architecture 297 --
12 The Eurocurrency and Eurobond Markets 304 --
12.2 Participants in the Eurocurrency and Eurobond markets 306 --
12.3 The origins and development of the Eurocurrency market 306 --
12.4 The characteristics of the Eurodollar market 308 --
12.5 The competitive advantage of Eurobanks 309 --
12.6 The coexistence of domestic and Eurobanking 310 --
12.7 The creation of Eurodollar deposits and loans 310 --
12.8 The pros and cons of the Eurocurrency markets 312 --
12.9 Euromarkets and government regulation and policy 313 --
12.10 The international capital market and the Eurobond market 314 --
12.11 The origins and development of the Eurobond market 314 --
12.12 Typical features of a Eurobond 315 --
12.13 Control and regulation of the Eurobond market 316 --
12.14 The management of a Eurobond issue 318 --
12.15 Innovations in the Eurobond market 320 --
13 Currency Derivatives: Futures, Options and Swaps 323 --
13.2 The growth of derivative markets 324 --
13.3 Exchange-traded futures and options contracts 325 --
13.4 Currency futures and currency forwards 326 --
13.5 The use of currency futures for hedging purposes 328 --
13.6 The symmetry of profit/losses on futures/forward positions 330 --
13.7 The pricing of currency futures 331 --
13.8 Currency options 332 --
13.9 A currency option versus a forward contract for hedging 335 --
13.10 A currency option versus a forward for speculating 336 --
13.11 The pricing of currency options 339 --
13.12 Intrinsic value and time value 340 --
13.13 The distribution of the option premium between time and intrinsic value 341 --
13.14 The Garman and Kohlhagen option-pricing formula 34. 13.15 A numerical example of the Garman-Kohlhagen formula 347 --
13.16 Problems with the currency option-pricing formula 349 --
13.17 The over-the-counter market in options 350 --
13.18 The swaps market 350 --
13.19 Potential currency swap scenarios 351 --
13.20 A currency swap agreement 352 --
13.21 Distinguishing characteristics of the swap market from the forward and futures markets 354 --
14 International Macroeconomic Policy Coordination 358 --
14.2 What is meant by international policy coordination? 359 --
14.3 Why does the need for international policy coordination arise? 360 --
14.4 The benefits from international policy coordination 361 --
14.5 A game theory demonstration of the gains from coordination 366 --
14.6 Other potential benefits from coordination 367 --
14.7 The potential for coordination to make countries worse off 368 --
14.8 Estimates of the benefits and losses from international policy coordination 369 --
14.9 Problems and obstacles to international policy coordination 372 --
15 The International Debt Crisis 377 --
15.2 The low and middle-income developing countries 378 --
15.3 Characteristics of typical middle-income developing countries 379 --
15.4 The economics of developing country borrowing 380 --
15.5 Different types of capital inflows into developing countries 381 --
15.6 Measures of indebtedness 382 --
15.7 Background and origins of the debt crisis 384 --
15.8 The emergence of the debt crisis 385 --
15.9 The Mexican moratorium 387 --
15.10 The dimensions of the debt crisis 388 --
15.11 A supply and demand framework for analysing the debt crisis 389 --
15.12 The economics of default 391 --
15.13 The role and viewpoints of the actors in the debt crisis 393 --
15.14 The management of the debt crisis 395 --
15.15 An overall evaluation of the debt-crisis management 404 --
15.16 Post-Brady Plan crises in three of the countries 406 --
16 Economic and Monetary Union in Europe 409 --
16.2 The Snake in the Tunnel 410 --
16.3 The background to the European Monetary System 411 --
16.4 The Exchange Rate Mechanism 412 --
16.5 The European Currency Unit and its role as an indicator of divergence 413 --
16.6 Financing facilities and monetary cooperation 415 --
16.7 An assessment of the European Monetary System 416 --
16.8 The EMS as an anti-inflation zone 418 --
16.9 Intervention policy in the EMS 422 --
16.10 The economic performance of ERM and non-ERM countries 423 --
16.11 What is meant by economic and monetary union? 423 --
16.12 Benefits of Economic and Monetary Union 425 --
16.13 Costs of Economic and Monetary Union 427 --
16.14 A history of the road to European Monetary Union 430 --
16.15 The Maastricht Treaty 433 --
16.16 An evaluation of the Maastricht criteria 434 --
16.17 The Stability and Growth Pact 436 --
16.18 The changeover to the single currency 436 --
16.19 The performance of the euro in the foreign exchange market 438 --
16.20 The eurosystem 438 --
16.21 The Exchange Rate Mechanism II 442 --
16.22 The accession countries and EMU 444 --
17 Currency Crises and the East Asian Financial Crisis 450 --
17.2 First-generation models of currency crises 451 --
17.3 Second-generation models of currency crises 455 --
17.4 Third-generation and other models of currency and financial crises 457 --
17.5 The run-up to the Asian crisis 460 --
17.6 The macroeconomic fundamentals 460 --
17.7 The role of external factors in the crisis 466 --
17.8 The role of the financial system 467 --
17.9 The immediate causes of the crisis 469 --
17.10 An analysis of the crisis 473 --
17.11 The IMF handling of the crisis 475 --
17.12 An evaluation of the IMF programmes 477 --
17.13 The crisis and post-crisis performance of the economies 478 --
17.14 Early-warning systems 479.