International macroeconomics


This class offers an overview of different research topics in international macroeconomics. In particular, our focus is on exchange rates and issues in international macro-finance (international asset allocations, international sovereign borrowing). We investigate these topics with the help of the most recent theoretical and empirical research.

When you complete this course, you should be able to:

  • Understand and master the different literature covered during classes,
  • Formulate research ideas and initiate research projects (Master theses) in the area.



Part 1: Exchange Rates, International Portfolios and International Business Cycles – Tomasz Michalski
Part 2: Sovereign debt – Eric Mengus


Class Hours  Topic
1 2h Behavior of nominal exchange rates
2 2h The Real Exchange Rate
3 2h Exchange Rate Regimes and Crises
4 2h International Asset Allocation and the Home Bias
5 2h International Business Cycles and Insurance
6 2h Why sovereign debt is specific and some history of sovereign borrowing and lending
7 2h Reputation model of sovereign debt and their limits
8 2h Resuscitating reputation models
9 2h The internal consequences of default


I. Exchange Rates and International Portfolios

General texts:
– Maurice Obstfeld and Kenneth Rogoff, 1996. Foundations of International Macroeconomics. Cambridge MA and London, England, MIT Press.
– Carlos A. Vegh, 2013. Open Economy Macroeconomics in Developing Countries. Cambridge MA and London, England, MIT Press.

1.1 Behavior of nominal exchange rates

Main themes:
– Simple models of exchange rate behaviour (PPP, UIRP, the monetary model, Taylor-rule models, Gourinchas – Rey)
– The Meese and Rogoff puzzle
– Exchange rates as asset prices
– Predictability of exchange rates

– Charles Engel and Kenneth D. West, 2005. Exchange Rates and Fundamentals, Journal of Political Economy, 113: 485–517.
– Pierre-Olivier Gourinchas and Helene Rey, 2007. International Financial Adjustment, Journal of Political Economy, 115: 665–703.
– Barbara Rossi, 2013. Exchange rate predictability. Journal of Economic Literature, 51: 1063–1119.

1.2 The Real Exchange Rate

Main themes:

– PPP and its failures
– The Redux model and its extensions

–  Maurice Obstfeld and Kenneth Rogoff, 1995. Exchange rate dynamics redux. Journal of Political Economy, 103: 624–60.
– Alan Taylor and Mark Taylor, 2004. The Purchasing Power Parity Debate. Journal of Economic Perspectives, 18: 135–158.

1.3 Exchange Rate Regimes and Crises

Main themes:
– First-generation currency crisis models: the Krugman BoP model
– Second-generation models: coordination failures
– Third generation models

– Roberto Chang and Andres Velasco, 2001. A model of financial crises in emerging markets. Quarterly Journal of Economics, 116:489–517.
– Robert Flood and Peter Garber, 1984. Collapsing Exchange Rate Regimes: Some Linear Examples. Journal of International Economics, 17: 1–13.
– Paul Krugman, 1979. A Model of Balance of Payments Crises. Journal of Money, Credit, and Banking, 11: 311–325.
– Maurice Obstfeld, 1996. Models of currency crises with self-fulfilling features. European Economic Review, 40: 1037–1048.

1.4 International Asset Allocation and the Home Bias

Main themes:
– International portfolio allocation,
– The causes of the home bias,
– The risk premium in the exchange rate market.

– Nicolas Coeurdacier and Helene Rey. 2011. Home Bias in Open Economy Financial Macroeconomics. NBER Working Paper 17691.
– Brian Hill and Tomasz Michalski. 2014. Risk versus ambiguity and international security design. mimeo HEC Paris.
–  Stijn Van Nieuwerburgh and Laura Veldkamp. 2009. Information Immobility and the Home Bias Puzzle. Journal of Finance, 64: 1187–1215.
– Hanno Lustig & Adrien Verdelhan, 2007. The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk, American Economic Review, 97: 89-117.
– Hanno Lustig & Adrien Verdelhan, 2011. The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: Reply, American Economic Review, 101: 3477-3500.

1.5 International Business Cycles and Insurance

Main themes:
– The standard two-country model of international business cycles
– International risk sharing 

– Aguiar, M. and G. Gopinath (2007). Emerging market business cycles: The cycle is the trend. Journal of Political Economy 115(1).
– Mendoza, E. G. (1991). Real business cycles in a small open economy. American Economic Review, 797–818.
– Backus, D., P. Kehoe, and F. Kydland (1992). International real business cycles. Journal of Political Economy 100: 745-75.
– Heathcote, J. and F. Perri (2002). Financial autarky and international business cycles. Journal of Monetary Economics 49: 601–627.
– Colacito, R. and M. M. Croce (2011). Risks for the long-run and the real exchange rate. Journal of Political Economy 119(1).
– Heathcote, J. and F. Perri (2014). Handbook of international Economics, Volume 4. Elsevier.

II. Sovereign debt

2.1 Why sovereign debt is specific and some history of sovereign borrowing and lending

–  Panizza, U., Sturzenegger, F. and Zettelmeyer, J. (2009), The Economics and Law of Sovereign Debt and Default, Journal of Economic Literature, 47:3, 653-700.

2.2 Reputation model of sovereign debt and their limits

– Arellano, C. (2008) “Default Risk and Income Fluctuations in Emerging Economies,” American Economic Review, vol. 98, 690-712.
– Eaton, J. and M. Gersovitz (1981): “Debt with Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies, 48, 289-309.
– Bulow, J. and K. Rogoff (1989): “Sovereign Debt: Is to Forgive to Forget?” American Economic Review, 79, 43-50.

2.3 Resuscitating reputation models

– Cole, H. and Kehoe, P. (1998), “Models of Sovereign Debt: Partial versus General Reputations,” International Economic Review, vol. 39, 55-70.
– Hellwig, C. and Lorenzoni G. (2009) “Bubbles and Self-Enforcing Debt,” Econometrica,  vol. 77, 1137-1164.

2.4 The internal consequences of default

– Broner, F. A., A. Martin, and J. Ventura (2010): “Sovereign Risk and Secondary Markets” American Economic Review, 100, 1523-1555.
– Gennaioli, N., A. Martin, and S. Rossi (2014): “Sovereign Default, Domestic Banks, and Financial Institutions,” Journal of Finance, 69, 819-866.
– Mendoza, E. G. and V. Z. Yue (2012): “A General Equilibrium Model of Sovereign Default and Business Cycles,” The Quarterly Journal of Economics, 127, 889-946.
– Mengus, E. (2014), “Honoring Sovereign Debt or Bailing Out Domestic Residents: A Theory of Internal Costs of Default”, mimeo, TSE and HEC.