Exchange Rates and the Open Economy

For the last section of the course, we consider some open economy issues. The first section looks at how exchange rates are determined, and the consequences for exchange rate volatility. The second section incorporates international trade and exchange rate behavior into a version of the IS-LM model  that facilitates thinking about policy coordination between countries. The final setion dissects some currency crises.
Download transparencies for this section here.
Review questions for this section can be found here.

Required Reading
The determination of exchange rates
The Economist: The Big Mac Index
Why are exchange rates so volatile?

The Economist: Why Currencies Overshoot
Rogoff, Kenneth (2002): Why are G3 exchange rates so fickle?
Fairlamb, David (2000): Tame the Currency Markets?
The open-economy IS-LM model
Krugman, Paul (1994): The Twin Deficits
Currency Crises