290049 VU Special Topics in Economics (2021S)

The increase in the internationalisation of goods and financial markets implies a heightened importance in understanding the mechanisms of real and monetary open economics. To significant extent current economic structures --- especially in a small open economy like Austria --- are related to external trade. Exchange rates, export and import ratios, foreign direct investments, currency pegs, etc. are frequently used catch phrases, which have to be put into perspective and be underpinned with economic theory.

Part 1: Introduction and Recap: Exchange Rates, the Balance of Payments
-GDP, import and export ratios, the current and capital account.
-Real and nominal exchange rates, purchasing power parity,

Part 2: The goods and the financial market in a closed economy
-Effects of fiscal and monetary policy, effects of thrift; limits of the model.

Part 3: Advancing the goods model to account for foreign trade
-Export and imports, drivers and causes for international trade, implications on the equilibrium on the goods market; limits of the model.

Part 4: Advancing the financial model to account for cross border transactions
-Interest rate parity, exchange rate policies and regimes. Why does the expectation of an interest rate increase in the US pressurize currencies of developing countries?
-Effects of fiscal and monetary policy in flexible exchange rate mechanisms, implications of including trade and foreign transactions from a business cycle perspective; limits of the model.

Part 5: Implications of foreign trade
-Ricardo s model of comparative advantage
-Economies of scale and the infant industry argument
-Firm competition and tax competition

Part 6 : Advanced topics in international macroeconomics
-Depending on time and interest of students
-Effects of tariffs in a simple supply demand model
-Factor mobility, Drivers and consequences of foreign direct investment, cross border mobility of the factors labour and capital.
-Case studies: currency crises of Argentina 1998-2002 and Mexico 1994-1995.
-US current account deficit: dark matter theory in economics or the sword of Damocles.
-Optimum currency areas vs. the Euro Area.
-Foreign currency loans: background and consequences.

The course aims at providing an understanding of the central interactions between interest rates, goods and financial transactions, exchange rates, monetary reserves and business cycle policy. Successful participants know the balance of payments, are able e.g. to judge on the consequences of monetary policy on exchange rates and to explain the mechanics.