BOOK
International Finance: Theory and Policy, Global Edition
Paul R. Krugman | Maurice Obstfeld | Marc Melitz
(2017)
Additional Information
Book Details
Abstract
For courses in International Finance.
A balanced approach to theory and policy applications
International Finance: Theory and Policy provides engaging, balanced coverage of the key concepts and practical applications of the discipline. An intuitive introduction to international finance theory is followed by detailed coverage of policy applications. With this new 11th Edition, Global Edition, the author team of Nobel Prize-winning economist Paul Krugman, renowned researcher Maurice Obstfeld, and Marc Melitz of Harvard University continues to set the standard for international finance courses.
Pearson MyLabTM Economics not included. Students, if MyLab is a recommended/mandatory component of the course, please ask your instructor for the correct ISBN and course ID. MyLab should only be purchased when required by an instructor. Instructors, contact your Pearson rep for more information.
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Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover | Cover | ||
| Title Page | 3 | ||
| Copyright Page | 4 | ||
| Brief Contents | 5 | ||
| Contents | 6 | ||
| Preface | 13 | ||
| 1 Introduction | 21 | ||
| What Is International Economics About? | 23 | ||
| The Gains from Trade | 24 | ||
| The Pattern of Trade | 25 | ||
| How Much Trade? | 25 | ||
| Balance of Payments | 26 | ||
| Exchange Rate Determination | 27 | ||
| International Policy Coordination | 27 | ||
| The International Capital Market | 28 | ||
| International Economics: Trade and Money | 29 | ||
| Part 1 Exchange Rates and Open‐Economy Macroeconomics | 31 | ||
| 2 National Income Accounting and the Balance of Payments | 31 | ||
| The National Income Accounts | 33 | ||
| National Product and National Income | 34 | ||
| Capital Depreciation and International Transfers | 35 | ||
| Gross Domestic Product | 35 | ||
| National Income Accounting for an Open Economy | 36 | ||
| Consumption | 36 | ||
| Investment | 36 | ||
| Government Purchases | 37 | ||
| The National Income Identity for an Open Economy | 37 | ||
| An Imaginary Open Economy | 38 | ||
| The Current Account and Foreign Indebtedness | 38 | ||
| Saving and the Current Account | 40 | ||
| Private and Government Saving | 41 | ||
| Box: The Mystery of the Missing Deficit | 42 | ||
| The Balance of Payments Accounts | 44 | ||
| Examples of Paired Transactions | 45 | ||
| The Fundamental Balance of Payments Identity | 46 | ||
| The Current Account, Once Again | 47 | ||
| The Capital Account | 48 | ||
| The Financial Account | 48 | ||
| Statistical Discrepancy | 49 | ||
| Official Reserve Transactions | 50 | ||
| Case Study: The Assets and Liabilities of the World’s Biggest Debtor | 51 | ||
| Summary | 55 | ||
| 3 Exchange Rates and the Foreign Exchange Market: An Asset Approach | 60 | ||
| Exchange Rates and International Transactions | 61 | ||
| Domestic and Foreign Prices | 61 | ||
| Exchange Rates and Relative Prices | 63 | ||
| The Foreign Exchange Market | 64 | ||
| The Actors | 64 | ||
| box: Exchange Rates, Auto Prices, and Currency Wars | 65 | ||
| Characteristics of the Market | 66 | ||
| Spot Rates and Forward Rates | 68 | ||
| Foreign Exchange Swaps | 69 | ||
| Futures and Options | 69 | ||
| The Demand for Foreign Currency Assets | 70 | ||
| Assets and Asset Returns | 70 | ||
| Box: Offshore Currency Markets: The Case of the Chinese Yuan | 71 | ||
| Risk and Liquidity | 73 | ||
| Interest Rates | 74 | ||
| Exchange Rates and Asset Returns | 74 | ||
| A Simple Rule | 76 | ||
| Return, Risk, and Liquidity in the Foreign Exchange Market | 77 | ||
| Equilibrium in the Foreign Exchange Market | 78 | ||
| Interest Parity: The Basic Equilibrium Condition | 78 | ||
| How Changes in the Current Exchange Rate Affect Expected Returns | 79 | ||
| The Equilibrium Exchange Rate | 81 | ||
| Interest Rates, Expectations, and Equilibrium | 83 | ||
| The Effect of Changing Interest Rates on the Current Exchange Rate | 83 | ||
| The Effect of Changing Expectations on the Current Exchange Rate | 85 | ||
| Case Study: What Explains the Carry Trade? | 85 | ||
| Summary | 88 | ||
| 4 Money, Interest Rates, and Exchange Rates | 96 | ||
| Money Defined: A Brief Review | 97 | ||
| Money as a Medium of Exchange | 97 | ||
| Money as a Unit of Account | 97 | ||
| Money as a Store of Value | 98 | ||
| What Is Money? | 98 | ||
| How the Money Supply Is Determined | 98 | ||
| The Demand for Money by Individuals | 99 | ||
| Expected Return | 99 | ||
| Risk | 100 | ||
| Liquidity | 100 | ||
| Aggregate Money Demand | 100 | ||
| The Equilibrium Interest Rate: The Interaction of Money Supply and Demand | 102 | ||
| Equilibrium in the Money Market | 103 | ||
| Interest Rates and the Money Supply | 104 | ||
| Output and the Interest Rate | 105 | ||
| The Money Supply and the Exchange Rate in the Short Run | 106 | ||
| Linking Money, the Interest Rate, and the Exchange Rate | 106 | ||
| U.S. Money Supply and the Dollar/Euro Exchange Rate | 109 | ||
| Europe’s Money Supply and the Dollar/Euro Exchange Rate | 109 | ||
| Money, the Price Level, and the Exchange Rate in the Long Run | 112 | ||
| Money and Money Prices | 112 | ||
| The Long‐Run Effects of Money Supply Changes | 113 | ||
| Empirical Evidence on Money Supplies and Price Levels | 114 | ||
| Money and the Exchange Rate in the Long Run | 115 | ||
| Inflation and Exchange Rate Dynamics | 116 | ||
| Short‐Run Price Rigidity versus Long‐Run Price Flexibility | 116 | ||
| Box: Money Supply Growth and Hyperinflation in Zimbabwe | 118 | ||
| Permanent Money Supply Changes and the Exchange Rate | 120 | ||
| Exchange Rate Overshooting | 123 | ||
| Case Study: Inflation Targeting and Exchange Rate in Emerging Countries | 123 | ||
| Summary | 126 | ||
| 5 Price Levels and the Exchange Rate in the Long Run | 131 | ||
| The Law of One Price | 132 | ||
| Purchasing Power Parity | 133 | ||
| The Relationship between PPP and the Law of One Price | 133 | ||
| Absolute PPP and Relative PPP | 134 | ||
| A Long‐Run Exchange Rate Model Based on PPP | 135 | ||
| The Fundamental Equation of the Monetary Approach | 135 | ||
| Ongoing Inflation, Interest Parity, and PPP | 137 | ||
| The Fisher Effect | 138 | ||
| Empirical Evidence on PPP and the Law of One Price | 141 | ||
| Explaining the Problems with PPP | 143 | ||
| Trade Barriers and Nontradables | 143 | ||
| Departures from Free Competition | 144 | ||
| Differences in Consumption Patterns and Price Level Measurement | 145 | ||
| Box: Measuring and Comparing Countries’ Wealth Worldwide: the International Comparison Program (ICP) | 145 | ||
| PPP in the Short Run and in the Long Run | 148 | ||
| Case Study: Why Price Levels Are Lower in Poorer Countries | 149 | ||
| Beyond Purchasing Power Parity: A General Model of Long‐Run Exchange Rates | 151 | ||
| The Real Exchange Rate | 151 | ||
| Demand, Supply, and the Long‐Run Real Exchange Rate | 153 | ||
| Box: Sticky Prices and the Law of the Price: Evidence from Scandinavian Duty‐Free Shops | 154 | ||
| Nominal and Real Exchange Rates in Long‐Run Equilibrium | 156 | ||
| International Interest Rate Differences and the Real Exchange Rate | 158 | ||
| Real Interest Parity | 159 | ||
| Summary | 161 | ||
| 6 Output and the Exchange Rate in the Short Run | 169 | ||
| Determinants of Aggregate Demand in an Open Economy | 170 | ||
| Determinants of Consumption Demand | 170 | ||
| Determinants of the Current Account | 171 | ||
| How Real Exchange Rate Changes Affect the Current Account | 172 | ||
| How Disposable Income Changes Affect the Current Account | 173 | ||
| The Equation of Aggregate Demand | 173 | ||
| The Real Exchange Rate and Aggregate Demand | 173 | ||
| Real Income and Aggregate Demand | 174 | ||
| How Output Is Determined in the Short Run | 175 | ||
| Output Market Equilibrium in the Short Run: The DD Schedule | 176 | ||
| Output, the Exchange Rate, and Output Market Equilibrium | 176 | ||
| Deriving the DD Schedule | 177 | ||
| Factors That Shift the DD Schedule | 178 | ||
| Asset Market Equilibrium in the Short Run: The AA Schedule | 181 | ||
| Output, the Exchange Rate, and Asset Market Equilibrium | 181 | ||
| Deriving the AA Schedule | 183 | ||
| Factors That Shift the AA Schedule | 183 | ||
| Short‐Run Equilibrium for an Open Economy: Putting the DD and AA Schedules Together | 184 | ||
| Temporary Changes in Monetary and Fiscal Policy | 186 | ||
| Monetary Policy | 187 | ||
| Fiscal Policy | 187 | ||
| Policies to Maintain Full Employment | 188 | ||
| Inflation Bias and Other Problems of Policy Formulation | 190 | ||
| Permanent Shifts in Monetary and Fiscal Policy | 191 | ||
| A Permanent Increase in the Money Supply | 191 | ||
| Adjustment to a Permanent Increase in the Money Supply | 192 | ||
| A Permanent Fiscal Expansion | 194 | ||
| Macroeconomic Policies and the Current Account | 195 | ||
| Gradual Trade Flow Adjustment and Current Account Dynamics | 197 | ||
| The J‐Curve | 197 | ||
| Exchange Rate Pass‐Through and Inflation | 198 | ||
| The Current Account, Wealth, and Exchange Rate Dynamics | 199 | ||
| Box: Understanding Pass‐Through to Import and Export Prices | 200 | ||
| The Liquidity Trap | 201 | ||
| Case Study: How Big Is the Government Spending Multiplier? | 204 | ||
| Summary | 206 | ||
| 7 Fixed Exchange Rates and Foreign Exchange Intervention | 216 | ||
| Why Study Fixed Exchange Rates? | 217 | ||
| Central Bank Intervention and the Money Supply | 218 | ||
| The Central Bank Balance Sheet and the Money Supply | 218 | ||
| Foreign Exchange Intervention and the Money Supply | 220 | ||
| Sterilization | 221 | ||
| The Balance of Payments and the Money Supply | 221 | ||
| How the Central Bank Fixes the Exchange Rate | 222 | ||
| Foreign Exchange Market Equilibrium under a Fixed Exchange Rate | 223 | ||
| Money Market Equilibrium under a Fixed Exchange Rate | 223 | ||
| A Diagrammatic Analysis | 224 | ||
| Stabilization Policies with a Fixed Exchange Rate | 225 | ||
| Monetary Policy | 226 | ||
| Fiscal Policy | 227 | ||
| Changes in the Exchange Rate | 228 | ||
| Adjustment to Fiscal Policy and Exchange Rate Changes | 229 | ||
| Balance of Payments Crises and Capital Flight | 230 | ||
| Managed Floating and Sterilized Intervention | 233 | ||
| Perfect Asset Substitutability and the Ineffectiveness of Sterilized Intervention | 233 | ||
| Case Study: Can Markets Attack a Strong Currency? The Case of Switzerland | 234 | ||
| Foreign Exchange Market Equilibrium under Imperfect Asset Substitutability | 237 | ||
| The Effects of Sterilized Intervention with Imperfect Asset Substitutability | 237 | ||
| Evidence on the Effects of Sterilized Intervention | 239 | ||
| Reserve Currencies in the World Monetary System | 240 | ||
| The Mechanics of a Reserve Currency Standard | 240 | ||
| The Asymmetric Position of the Reserve Center | 241 | ||
| The Gold Standard | 242 | ||
| The Mechanics of a Gold Standard | 242 | ||
| Symmetric Monetary Adjustment under a Gold Standard | 242 | ||
| Benefits and Drawbacks of the Gold Standard | 243 | ||
| The Bimetallic Standard | 244 | ||
| The Gold Exchange Standard | 244 | ||
| Case Study: The Cost to Become an International Currency: The Renminbi Case | 245 | ||
| Summary | 248 | ||
| Part 2 International Macroeconomic Policy | 261 | ||
| 8 International Monetary Systems: An Historical Overview | 261 | ||
| Macroeconomic Policy Goals in an Open Economy | 262 | ||
| Internal Balance: Full Employment and Price Level Stability | 263 | ||
| External Balance: The Optimal Level of the Current Account | 264 | ||
| Box: Can a Country Borrow Forever? The Case of New Zealand | 266 | ||
| Classifying Monetary Systems: The Open‐Economy Monetary Trilemma | 270 | ||
| International Macroeconomic Policy under the Gold Standard, 1870–1914 | 271 | ||
| Origins of the Gold Standard | 272 | ||
| External Balance under the Gold Standard | 272 | ||
| The Price‐Specie‐Flow Mechanism | 273 | ||
| The Gold Standard “Rules of the Game”: Myth and Reality | 274 | ||
| Internal Balance under the Gold Standard | 274 | ||
| Case Study: The Political Economy of Exchange Rate Regimes: Conflict over America’s Monetary Standard during the 1890s | 275 | ||
| The Interwar Years, 1918–1939 | 277 | ||
| The Fleeting Return to Gold | 277 | ||
| International Economic Disintegration | 278 | ||
| case study: The International Gold Standard and the Great Depression | 279 | ||
| The Bretton Woods System and the International Monetary Fund | 280 | ||
| Goals and Structure of the IMF | 280 | ||
| Convertibility and the Expansion of Private Financial Flows | 281 | ||
| Speculative Capital Flows and Crises | 282 | ||
| Analyzing Policy Options for Reaching Internal and External Balance | 283 | ||
| Maintaining Internal Balance | 284 | ||
| Maintaining External Balance | 285 | ||
| Expenditure‐Changing and Expenditure‐Switching Policies | 286 | ||
| The External Balance Problem of the United States under Bretton Woods | 287 | ||
| Case Study: The End of Bretton Woods, Worldwide Inflation, and the Transition to Floating Rates | 288 | ||
| The Mechanics of Imported Inflation | 290 | ||
| Assessment | 291 | ||
| The Case for Floating Exchange Rates | 292 | ||
| Monetary Policy Autonomy | 292 | ||
| Symmetry | 293 | ||
| Exchange Rates as Automatic Stabilizers | 294 | ||
| Exchange Rates and External Balance | 296 | ||
| Case Study: The First Years of Floating Rates, 1973–1990 | 296 | ||
| Macroeconomic Interdependence under a Floating Rate | 301 | ||
| Case Study: Transformation and Crisis in the World Economy | 302 | ||
| Case Study: The Dangers of Deflation | 308 | ||
| What Has Been Learned Since 1973? | 310 | ||
| Monetary Policy Autonomy | 310 | ||
| Symmetry | 312 | ||
| The Exchange Rate as an Automatic Stabilizer | 312 | ||
| External Balance | 313 | ||
| The Problem of Policy Coordination | 313 | ||
| Are Fixed Exchange Rates Even an Option for Most Countries? | 314 | ||
| Summary | 315 | ||
| 9 Financial Globalization: Opportunity and Crisis | 324 | ||
| The International Capital Market and the Gains from Trade | 325 | ||
| Three Types of Gain from Trade | 325 | ||
| Risk Aversion | 327 | ||
| Portfolio Diversification as a Motive for International Asset Trade | 327 | ||
| The Menu of International Assets: Debt versus Equity | 328 | ||
| International Banking and the International Capital Market | 329 | ||
| The Structure of the International Capital Market | 329 | ||
| Offshore Banking and Offshore Currency Trading | 330 | ||
| The Shadow Banking System | 331 | ||
| Banking and Financial Fragility | 332 | ||
| The Problem of Bank Failure | 332 | ||
| Government Safeguards against Financial Instability | 334 | ||
| Box: Does the IMF Cause Moral Hazard? | 338 | ||
| Moral Hazard and the Problem of “Too Big to Fail” | 338 | ||
| The Challenge of Regulating International Banking | 340 | ||
| The Financial Trilemma | 340 | ||
| International Regulatory Cooperation through 2007 | 342 | ||
| Case Study: The Global Financial Crisis of 2007–2009 | 344 | ||
| Box: Foreign Exchange Instability and Central Bank Swap Lines | 347 | ||
| International Regulatory Initiatives after the Global Financial Crisis | 343 | ||
| How Well Have International Financial Markets Allocated Capital and Risk? | 350 | ||
| The Extent of International Portfolio Diversification | 350 | ||
| The Extent of Intertemporal Trade | 352 | ||
| Onshore‐Offshore Interest Differentials | 353 | ||
| The Efficiency of the Foreign Exchange Market | 354 | ||
| Summary | 358 | ||
| 10 Optimum Currency Areas and the Euro | 363 | ||
| How the European Single Currency Evolved | 365 | ||
| What Has Driven European Monetary Cooperation? | 365 | ||
| Box: Brexit | 366 | ||
| The European Monetary System, 1979–1998 | 368 | ||
| German Monetary Dominance and the Credibility Theory of the EMS | 369 | ||
| Market Integration Initiatives | 371 | ||
| European Economic and Monetary Union | 371 | ||
| The Euro and Economic Policy in the Euro Zone | 372 | ||
| The Maastricht Convergence Criteria and the Stability and Growth Pact | 373 | ||
| The European Central Bank and the Eurosystem | 374 | ||
| The Revised Exchange Rate Mechanism | 374 | ||
| The Theory of Optimum Currency Areas | 375 | ||
| Economic Integration and the Benefits of a Fixed Exchange Rate Area: The GG Schedule | 375 | ||
| Economic Integration and the Costs of a Fixed Exchange Rate Area: The LL Schedule | 377 | ||
| The Decision to Join a Currency Area: Putting the GG and LL Schedules Together | 380 | ||
| What Is an Optimum Currency Area? | 381 | ||
| Other Important Considerations | 381 | ||
| Case Study: Is Europe an Optimum Currency Area? | 383 | ||
| The Euro Crisis and the Future of EMU | 386 | ||
| Origins of the Crisis | 386 | ||
| Self‐Fulfilling Government Default and the “Doom Loop” | 392 | ||
| A Broader Crisis and Policy Responses | 394 | ||
| ECB Outright Monetary Transactions | 395 | ||
| The Future of EMU | 396 | ||
| Summary | 397 | ||
| 11 Developing Countries: Growth, Crisis, and Reform | 402 | ||
| Income, Wealth, and Growth in the World Economy | 403 | ||
| The Gap between Rich and Poor | 403 | ||
| Has the World Income Gap Narrowed Over Time? | 404 | ||
| The Importance of Developing Countries for Global Growth | 406 | ||
| Structural Features of Developing Countries | 407 | ||
| Box: The Commodity Supercycle | 409 | ||
| Developing‐Country Borrowing and Debt | 412 | ||
| The Economics of Financial Inflows to Developing Countries | 413 | ||
| The Problem of Default | 414 | ||
| Alternative Forms of Financial Inflow | 416 | ||
| The Problem of “Original Sin” | 417 | ||
| The Debt Crisis of the 1980s | 419 | ||
| Reforms, Capital Inflows, and the Return of Crisis | 420 | ||
| East Asia: Success and Crisis | 423 | ||
| The East Asian Economic Miracle | 424 | ||
| Box: Why Have Developing Countries Accumulated Such High Levels of International Reserves? | 424 | ||
| Asian Weaknesses | 426 | ||
| Box: What Did East Asia Do Right? | 428 | ||
| The Asian Financial Crisis | 429 | ||
| Lessons of Developing‐Country Crises | 430 | ||
| Reforming the World’s Financial “Architecture” | 431 | ||
| Capital Mobility and the Trilemma of the Exchange Rate Regime | 432 | ||
| “Prophylactic” Measures | 434 | ||
| Coping with Crisis | 435 | ||
| Understanding Global Capital Flows and the Global Distribution of Income: Is Geography Destiny? | 436 | ||
| Box: Capital Paradoxes | 437 | ||
| Summary | 441 | ||
| Mathematical Postscript | 446 | ||
| Postscript to Chapter 9: Risk Aversion and International Portfolio Diversification | 446 | ||
| An Analytical Derivation of the Optimal Portfolio | 446 | ||
| A Diagrammatic Derivation of the Optimal Portfolio | 447 | ||
| The Effects of Changing Rates of Return | 449 | ||
| Index | 453 | ||
| Credits | 465 |