1. Introduction
International macroeconomics (or international finance) as a subject covers many topical issues. What has happened (what will happen) to the dollar? Is the current account deficit too large? Should China devalue its yuan?1 Should it first liberalize financial flows? Should Sweden give up its currency to join the euro? Should emerging market economies liberalize their financial markets? Is this good for world economic growth, or a source of instability? How, if at all, should we reform the IMF? What about globalization? These are interesting questions. To answer them we need to learn some international finance. What is this field about?
As with international trade, international macro is the result of the fact that economic activity is affected by the existence of nations. If there were no national economies then we would not have this field. If there was no international trade we would not need international macro either. But countries do trade with each other, and because countries (not all, but many) use their own currencies we have to wonder about how these goods are paid for and what determines the prices that currencies trade at. More subtly, however, we have to also consider the fact that countries borrow and lend from each other: in other words, they trade inter-temporally — consumption today for consumption in the future. Because of international borrowing and lending economic opportunities are expanded and households have better op- tions to smooth their incomes. These are good things. But just as the existence of banks make bank panics possible, the existence of an international financial system makes international financial crises possible. This is where all the interesting action of the course comes from. In order to understand such crises we need to understand the nature of the international