BAC 820: International Finance Notes- Kenyatta University

SUBJECT CONTENT
LESSON: PAGE
1 THE BALANCE OF PAYMENTS ACCOUNTING
International Flow of Funds
Definitions of Balance
Balance-of-Payments Accounting Under Flexible Rates
International Trade Flows
Correcting a Balance of Trade Deficit 1
2 INTERNATIONAL CAPITAL FLOWS
Factors Affecting Direct Foreign Investment
Factors Affecting International Portfolio Investment
Agencies that Facilitate International Flows
How International Trade Affects an MNC’s Value
Valuation Model for an MNC 17
3 EXCHANGE RATES
Managing Currency Risk
Structure of Exchange Rates: Spot and Forward Rates
Foreign Exchange Exposure
Currency Options, Futures and Swaps 27
4 MECHANICS OF BALANCE-OF-PAYMENTS ADJUSTMENT
The Absorption Approach
The Monetary Approach to the Balance of Payments
Common Ground of the Two Theories
Changes in Competitiveness
Flexible Rates of Exchange
Adjustment Mechanics and Disturbances 57
5 THE IS -LM CURVE MODEL
Money Market Equilibrium: The LM Curve
Product Market Equilibrium: The IS Curve
The IS and LM Curves Combined 73
6 MONETARY AND FISCAL POLICY IN THE OPEN ECONOMY
The Mundell-Fleming Model
The Case of Imperfect Capital Mobility
The Case of Perfect Capital Mobility
Government Intervention Approaches
Theil’s Optimising Approach
Tinbergen’s Fixed Targets Approach. 100
7 MODERN THEORIES AND ALTERNATIVE SYSTEMS OF
EXCHANGE RATES
Modern Theories of Exchange Rates
The Monetary Theory of Exchange Rates
The Asset Approach to Exchange Rates
The Portfolio-Balance Approach to Exchange Rates
Varying Elasticities
Stock Adjustment and Flow Fluctuations
Other Theories of Overshooting
Theories of Exchange-Rate Volatility 125
iv
The Dornbusch Sticky-Price Theory
Dornbusch model
Hybrid Systems of Exchange Rates
Target Zones
8 SPECULATIVE ATTACKS
The Theory
The Model With a Myopic Central Bank
An Optimizing Central Bank 159
9 INTERNATIONAL LINKAGES ADJUSTMENT AND INTERDEPENDENCE
The Balance of Payments and Exchange Rates
Balance of Payments
External Accounts Must Balance
Fixed Exchange Rates
Flexible Exchange Rates
Floating, Clean And Dirty
The Exchange Rate in the Long Run
International Adjustment and Interdependence
The Monetary Approach to the Balance of Payments
The Monetary Approach to the Balance of Payments
Sterilization
The Monetary Approach and the IMF
The Monetary Approach and Depreciation
Flexible Exchange Rates, Money, And Prices
Exchange Rate Overshooting
Purchasing Power Parity
External Competitiveness
Interest Differentials and Exchange Rate Expectations
Exchange Rate Fluctuations and Interdependence
The Choice of Exchange Rate Regimes 174
10 FOREIGN EXCHANGE MARKETS AND EXPERIMENTS
Overlapping-Generations Model And Monetary Economics
Monetary and Fiscal Policy
The Kareken and Wallace OLG Economy 214