(Monetary Policy, FX-Markets and the International Currency System)
This course is taught in German. For any questions regarding a participation in English, please refer to the contacts named below.
The course deals with the following topics:
The foreign exchange market
Functioning of foreign exchange markets; market structure, players and evolution; FX transactions; hedging and speculation with FX.
Exchange rate economics
Theoretical background and empirical validity of covered interest parity (CIP), uncovered interest rate parity (UIP) and purchasing power parity (PPP); Monetary approach: Flexible price monetary model and sticky price (Dornbusch-) overshooting model; Balassa-Samuelson effect; FX valuation via the PPP and the macroeconomic balance approach; Real effective exchange rates; Empirical validity of the exchange rate theories; Exchange rates and the current account.
Exchange rate regimes and monetary policy in open economies
Classification of exchange rate regimes; the policy trilemma in open economies; historical development of the international monetary system; central bank interventions on the FX market.
Modeling open economy macroeconomics at the intermediate level
Implications of the Mundell-Fleming model for monetary and fiscal policy under fixed and flexible exchange rates. The BMW (IS-MP-PC) model of the open economy and its implication for monetary and fiscal policy under fixed and flexible exchange rates; optimum currency areas in the BMW model and in practice.
International experience with currency crises since the 1970s; modelling currency crises within the Mundell-Fleming framework.
Managed-floating as a solution for the policy trilemma.
By completing this course, students receive a profound understanding of the functioning of foreign exchange markets, the drivers of exchange rate movements and some exchange rate valuation methods used in practice. Next to a profound knowledge of exchange rate theory the course highlights its practical applicability, e.g. as an investment strategy. In the second part of the course students learn the principles of monetary policy in open economies, including its trade-offs and risks like currency crises. Students will be able to analyze these issues based on theoretical models as well as the international historical experience.
Course Materials and Literatur
All materials and literatur are available on WueCampus.