Peter J. Montiel is the Farleigh S. Dickinson '41 Professor of Economics at Williams College, and received his PhD from MIT. He has served as a Senior Policy Advisor at the IMF as well as Chief of the Macroeconomics and Growth Division of the Policy Research Department of the World Bank, and has provided expert counsel to a variety of regional development banks and central banks. He is the author of several books, including Development Macroeconomics, 3rd edition (with Richard Agenor, 2008) and Macroeconomics in Emerging Markets (2nd edition forthcoming), and numerous articles on international macroeconomics.

• Preface ixPart 1 Foundations 11 An Overview of the Book 31.1 What is International Macroeconomics? 41.2 The International Macroeconomics Toolkit 91.3 The Contents of this Book 101.4 Summary 152 Open-economy Macroeconomic Accounting 172.1 The Balance of Payments Accounts 182.2 Sub-accounts in the Balance of Payments 222.3 Basic BOP Facts for the United States 292.4 The NIPA in an Open Economy: Aggregate Identities 312.5 Sectoral Identities 372.6 Summary 413 Macroeconomic Influences on the Foreign Exchange Market 463.1 Exchange Rate Concepts 473.2 Supply and Demand for Foreign Exchange 503.3 Relative Prices of Domestic and Foreign Goods: The Real Exchange Rate 523.4 Relative Returns on Domestic and Foreign Assets: Interest Parity Conditions 633.5 Central Bank Intervention in the Foreign Exchange Market: Exchange Rate Regimes 703.6 Summary 77Appendix 3.1 Properties of Logarithms 804 The Macroeconomic Framework 824.1 Production Structure and Economic Agents 844.2 Equilibrium in the Market for Financial Assets 854.3 Equilibrium in the Market for Domestic Goods 914.4 Equations and Unknowns: Imposing Additional Structure 1004.5 Summary 108Appendix 4.1 The Marshall–Lerner Condition 109Appendix 4.2 The Framework in Log-Linear Form 110Part 2 Fixed Exchange Rates 1135 The Classical Gold Standard 1155.1 Evolution of the International Gold Standard 1165.2 Central Bank Behavior under the Gold Standard 1205.3 Summary 1276 Gold Standard Macroeconomics 1296.1 Short-Run Macroeconomics under the Gold Standard 1306.2 Short-Run Comparative Statics 1396.3 The Long-run Model 1456.4 The Gold Standard as an International Monetary System 1486.5 Summary 155Appendix 6.1 The Gold Standard with Zero Capital Mobility 1577 The Bretton Woods System 1597.1 Evolution of the Bretton Woods System 1607.2 Modeling Soft Pegs with Imperfect Capital Mobility 1647.3 The Bond Market Equilibrium (BB) Curve 1677.4 Properties of the BB Curve 1697.5 Summary 1748 Macroeconomics under ‘‘Soft’’ Pegs and Imperfect Capital Mobility 1778.1 Solving the Model 1788.2 Comparative Statics 1808.3 Bretton Woods as an International Monetary System 1878.4 Summary 199Appendix 8.1 Alternative Monetary Policy Regimes 2029 Fixed Exchange Rates in a Financially Integrated World: Currency Crises and ‘‘Hard’’ Pegs 2089.1 Soft Pegs with High Capital Mobility 2099.2 Currency Crises 2169.3 Financial Integration and Crises 2199.4 Modern Versions of Hard Pegs 2259.5 Soft Versus Hard Pegs: Some Policy Issues 2289.6 Summary 233Appendix 9.1 The Monetary Approach to the Balance of Payments (MABP) 236Part 3 Floating Exchange Rates 23910 Floating Exchange Rates I: Transitory Shocks 24110.1 Analytical Framework 24210.2 Solving the Floating Exchange Rate Model 24510.3 Comparative Statics 25210.4 Summary 265Appendix 10.1 The Asset Market Approach to the Exchange Rate 268Appendix 10.2 Algebraic Solution of the Log-linear Model 269Appendix 10.3 Interest Rate Targeting under Floating Exchange Rates 27011 Floating Exchange Rates II: Intermediate and Permanent Shocks 27211.1 Anticipated Future Shocks 27311.2 Multi-period Shocks 27911.3 Permanent Shocks 28411.4 Comparing Permanent and Transitory Shocks 29111.5 Summary 29612 Floating Exchange Rates III: Exchange Rate Dynamics 29912.1 Asymmetric Adjustment in Goods and Asset Markets 30012.2 The Dornbusch Overshooting Model 30112.3 Comparative Statics 30612.4 Generalizing the Model 31012.5 Summary 315Appendix 12.1 Proof that 31713 Long-run Equilibrium under Floating Exchange Rates 31913.1 A Long-run Model 32013.2 Solving the Long-run Model 32513.3 Comparative Statics 32713.4 Comparing the Short-run and Long-run Responses to Permanent Shocks 33113.5 The Role of Long-run Inflation 33313.6 Summary 338Appendix 13.1 The Long-run Floating Rate Model in Log-linear Form 340Appendix 13.2 Fixed Exchange Rates in the Long Run 34214 Floating Exchange Rates with Short-run Price Flexibility 34614.1 A ‘‘Flexprice’’ Model 34714.2 Real Exchange Rate Dynamics 34814.3 The Monetary Approach to the Exchange Rate 35314.4 Currency Crises Revisited 35814.5 Gradual Price Adjustment 36414.6 Summary 36915 Choosing an Exchange Rate Regime 37215.1 Optimality Criterion I: Minimizing the Costs of Making International Transactions 37315.2 Optimality Criterion II: Long-run Inflation Stabilization 37715.3 Optimality Criterion III: Short-run Macroeconomic Stability 38215.4 Weighing Optimality Criteria 38915.5 Summary 391Part 4 International Monetary Cooperation 39516 The International Financial Architecture 39716.1 The International Monetary System after Bretton Woods 39916.2 The International Debt Crisis 40016.3 Changes in the International Macroeconomic Environment in the 1990s 40416.4 Proposals for Reforming the International Financial Architecture 40916.5 Summary 41417 G-8 Policy Coordination 41617.1 Why Coordinate? Theory 41717.2 Comparative Statics 42617.3 Post-Bretton Woods International Policy Coordination among the G-8 Countries 43017.4 The US Current Account Deficit in the 2000s 43517.5 Summary 43818 Monetary Unification 44118.1 Economic Integration in Western Europe 44218.2 European Monetary Integration 44618.3 Monetary Union in West Africa 45318.4 The Eastern Caribbean Currency Union 45718.5 Summary 460Part 5 The New International Macroeconomics 46519 Intertemporal Issues in International Macroeconomics 46719.1 A Simple One-Good Model 46819.2 A Two-Good Model 47619.3 Introducing the Government 48019.4 Summary 485Index 487

Peter J. Montiel is the Farleigh S. Dickinson '41 Professor of Economics at Williams College, and received his PhD from MIT. He has served as a Senior Policy Advisor at the IMF as well as Chief of the Macroeconomics and Growth Division of the Policy Research Department of the World Bank, and has provided expert counsel to a variety of regional development banks and central banks. He is the author of several books, including Development Macroeconomics, 3rd edition (with Richard Agenor, 2008) and Macroeconomics in Emerging Markets (2nd edition forthcoming), and numerous articles on international macroeconomics.

• Preface ixPart 1 Foundations 11 An Overview of the Book 31.1 What is International Macroeconomics? 41.2 The International Macroeconomics Toolkit 91.3 The Contents of this Book 101.4 Summary 152 Open-economy Macroeconomic Accounting 172.1 The Balance of Payments Accounts 182.2 Sub-accounts in the Balance of Payments 222.3 Basic BOP Facts for the United States 292.4 The NIPA in an Open Economy: Aggregate Identities 312.5 Sectoral Identities 372.6 Summary 413 Macroeconomic Influences on the Foreign Exchange Market 463.1 Exchange Rate Concepts 473.2 Supply and Demand for Foreign Exchange 503.3 Relative Prices of Domestic and Foreign Goods: The Real Exchange Rate 523.4 Relative Returns on Domestic and Foreign Assets: Interest Parity Conditions 633.5 Central Bank Intervention in the Foreign Exchange Market: Exchange Rate Regimes 703.6 Summary 77Appendix 3.1 Properties of Logarithms 804 The Macroeconomic Framework 824.1 Production Structure and Economic Agents 844.2 Equilibrium in the Market for Financial Assets 854.3 Equilibrium in the Market for Domestic Goods 914.4 Equations and Unknowns: Imposing Additional Structure 1004.5 Summary 108Appendix 4.1 The Marshall–Lerner Condition 109Appendix 4.2 The Framework in Log-Linear Form 110Part 2 Fixed Exchange Rates 1135 The Classical Gold Standard 1155.1 Evolution of the International Gold Standard 1165.2 Central Bank Behavior under the Gold Standard 1205.3 Summary 1276 Gold Standard Macroeconomics 1296.1 Short-Run Macroeconomics under the Gold Standard 1306.2 Short-Run Comparative Statics 1396.3 The Long-run Model 1456.4 The Gold Standard as an International Monetary System 1486.5 Summary 155Appendix 6.1 The Gold Standard with Zero Capital Mobility 1577 The Bretton Woods System 1597.1 Evolution of the Bretton Woods System 1607.2 Modeling Soft Pegs with Imperfect Capital Mobility 1647.3 The Bond Market Equilibrium (BB) Curve 1677.4 Properties of the BB Curve 1697.5 Summary 1748 Macroeconomics under ‘‘Soft’’ Pegs and Imperfect Capital Mobility 1778.1 Solving the Model 1788.2 Comparative Statics 1808.3 Bretton Woods as an International Monetary System 1878.4 Summary 199Appendix 8.1 Alternative Monetary Policy Regimes 2029 Fixed Exchange Rates in a Financially Integrated World: Currency Crises and ‘‘Hard’’ Pegs 2089.1 Soft Pegs with High Capital Mobility 2099.2 Currency Crises 2169.3 Financial Integration and Crises 2199.4 Modern Versions of Hard Pegs 2259.5 Soft Versus Hard Pegs: Some Policy Issues 2289.6 Summary 233Appendix 9.1 The Monetary Approach to the Balance of Payments (MABP) 236Part 3 Floating Exchange Rates 23910 Floating Exchange Rates I: Transitory Shocks 24110.1 Analytical Framework 24210.2 Solving the Floating Exchange Rate Model 24510.3 Comparative Statics 25210.4 Summary 265Appendix 10.1 The Asset Market Approach to the Exchange Rate 268Appendix 10.2 Algebraic Solution of the Log-linear Model 269Appendix 10.3 Interest Rate Targeting under Floating Exchange Rates 27011 Floating Exchange Rates II: Intermediate and Permanent Shocks 27211.1 Anticipated Future Shocks 27311.2 Multi-period Shocks 27911.3 Permanent Shocks 28411.4 Comparing Permanent and Transitory Shocks 29111.5 Summary 29612 Floating Exchange Rates III: Exchange Rate Dynamics 29912.1 Asymmetric Adjustment in Goods and Asset Markets 30012.2 The Dornbusch Overshooting Model 30112.3 Comparative Statics 30612.4 Generalizing the Model 31012.5 Summary 315Appendix 12.1 Proof that 31713 Long-run Equilibrium under Floating Exchange Rates 31913.1 A Long-run Model 32013.2 Solving the Long-run Model 32513.3 Comparative Statics 32713.4 Comparing the Short-run and Long-run Responses to Permanent Shocks 33113.5 The Role of Long-run Inflation 33313.6 Summary 338Appendix 13.1 The Long-run Floating Rate Model in Log-linear Form 340Appendix 13.2 Fixed Exchange Rates in the Long Run 34214 Floating Exchange Rates with Short-run Price Flexibility 34614.1 A ‘‘Flexprice’’ Model 34714.2 Real Exchange Rate Dynamics 34814.3 The Monetary Approach to the Exchange Rate 35314.4 Currency Crises Revisited 35814.5 Gradual Price Adjustment 36414.6 Summary 36915 Choosing an Exchange Rate Regime 37215.1 Optimality Criterion I: Minimizing the Costs of Making International Transactions 37315.2 Optimality Criterion II: Long-run Inflation Stabilization 37715.3 Optimality Criterion III: Short-run Macroeconomic Stability 38215.4 Weighing Optimality Criteria 38915.5 Summary 391Part 4 International Monetary Cooperation 39516 The International Financial Architecture 39716.1 The International Monetary System after Bretton Woods 39916.2 The International Debt Crisis 40016.3 Changes in the International Macroeconomic Environment in the 1990s 40416.4 Proposals for Reforming the International Financial Architecture 40916.5 Summary 41417 G-8 Policy Coordination 41617.1 Why Coordinate? Theory 41717.2 Comparative Statics 42617.3 Post-Bretton Woods International Policy Coordination among the G-8 Countries 43017.4 The US Current Account Deficit in the 2000s 43517.5 Summary 43818 Monetary Unification 44118.1 Economic Integration in Western Europe 44218.2 European Monetary Integration 44618.3 Monetary Union in West Africa 45318.4 The Eastern Caribbean Currency Union 45718.5 Summary 460Part 5 The New International Macroeconomics 46519 Intertemporal Issues in International Macroeconomics 46719.1 A Simple One-Good Model 46819.2 A Two-Good Model 47619.3 Introducing the Government 48019.4 Summary 485Index 487

Peter J. Montiel is the Farleigh S. Dickinson '41 Professor of Economics at Williams College, and received his PhD from MIT. He has served as a Senior Policy Advisor at the IMF as well as Chief of the Macroeconomics and Growth Division of the Policy Research Department of the World Bank, and has provided expert counsel to a variety of regional development banks and central banks. He is the author of several books, including Development Macroeconomics, 3rd edition (with Richard Agenor, 2008) and Macroeconomics in Emerging Markets (2nd edition forthcoming), and numerous articles on international macroeconomics.

• Preface ixPart 1 Foundations 11 An Overview of the Book 31.1 What is International Macroeconomics? 41.2 The International Macroeconomics Toolkit 91.3 The Contents of this Book 101.4 Summary 152 Open-economy Macroeconomic Accounting 172.1 The Balance of Payments Accounts 182.2 Sub-accounts in the Balance of Payments 222.3 Basic BOP Facts for the United States 292.4 The NIPA in an Open Economy: Aggregate Identities 312.5 Sectoral Identities 372.6 Summary 413 Macroeconomic Influences on the Foreign Exchange Market 463.1 Exchange Rate Concepts 473.2 Supply and Demand for Foreign Exchange 503.3 Relative Prices of Domestic and Foreign Goods: The Real Exchange Rate 523.4 Relative Returns on Domestic and Foreign Assets: Interest Parity Conditions 633.5 Central Bank Intervention in the Foreign Exchange Market: Exchange Rate Regimes 703.6 Summary 77Appendix 3.1 Properties of Logarithms 804 The Macroeconomic Framework 824.1 Production Structure and Economic Agents 844.2 Equilibrium in the Market for Financial Assets 854.3 Equilibrium in the Market for Domestic Goods 914.4 Equations and Unknowns: Imposing Additional Structure 1004.5 Summary 108Appendix 4.1 The Marshall–Lerner Condition 109Appendix 4.2 The Framework in Log-Linear Form 110Part 2 Fixed Exchange Rates 1135 The Classical Gold Standard 1155.1 Evolution of the International Gold Standard 1165.2 Central Bank Behavior under the Gold Standard 1205.3 Summary 1276 Gold Standard Macroeconomics 1296.1 Short-Run Macroeconomics under the Gold Standard 1306.2 Short-Run Comparative Statics 1396.3 The Long-run Model 1456.4 The Gold Standard as an International Monetary System 1486.5 Summary 155Appendix 6.1 The Gold Standard with Zero Capital Mobility 1577 The Bretton Woods System 1597.1 Evolution of the Bretton Woods System 1607.2 Modeling Soft Pegs with Imperfect Capital Mobility 1647.3 The Bond Market Equilibrium (BB) Curve 1677.4 Properties of the BB Curve 1697.5 Summary 1748 Macroeconomics under ‘‘Soft’’ Pegs and Imperfect Capital Mobility 1778.1 Solving the Model 1788.2 Comparative Statics 1808.3 Bretton Woods as an International Monetary System 1878.4 Summary 199Appendix 8.1 Alternative Monetary Policy Regimes 2029 Fixed Exchange Rates in a Financially Integrated World: Currency Crises and ‘‘Hard’’ Pegs 2089.1 Soft Pegs with High Capital Mobility 2099.2 Currency Crises 2169.3 Financial Integration and Crises 2199.4 Modern Versions of Hard Pegs 2259.5 Soft Versus Hard Pegs: Some Policy Issues 2289.6 Summary 233Appendix 9.1 The Monetary Approach to the Balance of Payments (MABP) 236Part 3 Floating Exchange Rates 23910 Floating Exchange Rates I: Transitory Shocks 24110.1 Analytical Framework 24210.2 Solving the Floating Exchange Rate Model 24510.3 Comparative Statics 25210.4 Summary 265Appendix 10.1 The Asset Market Approach to the Exchange Rate 268Appendix 10.2 Algebraic Solution of the Log-linear Model 269Appendix 10.3 Interest Rate Targeting under Floating Exchange Rates 27011 Floating Exchange Rates II: Intermediate and Permanent Shocks 27211.1 Anticipated Future Shocks 27311.2 Multi-period Shocks 27911.3 Permanent Shocks 28411.4 Comparing Permanent and Transitory Shocks 29111.5 Summary 29612 Floating Exchange Rates III: Exchange Rate Dynamics 29912.1 Asymmetric Adjustment in Goods and Asset Markets 30012.2 The Dornbusch Overshooting Model 30112.3 Comparative Statics 30612.4 Generalizing the Model 31012.5 Summary 315Appendix 12.1 Proof that 31713 Long-run Equilibrium under Floating Exchange Rates 31913.1 A Long-run Model 32013.2 Solving the Long-run Model 32513.3 Comparative Statics 32713.4 Comparing the Short-run and Long-run Responses to Permanent Shocks 33113.5 The Role of Long-run Inflation 33313.6 Summary 338Appendix 13.1 The Long-run Floating Rate Model in Log-linear Form 340Appendix 13.2 Fixed Exchange Rates in the Long Run 34214 Floating Exchange Rates with Short-run Price Flexibility 34614.1 A ‘‘Flexprice’’ Model 34714.2 Real Exchange Rate Dynamics 34814.3 The Monetary Approach to the Exchange Rate 35314.4 Currency Crises Revisited 35814.5 Gradual Price Adjustment 36414.6 Summary 36915 Choosing an Exchange Rate Regime 37215.1 Optimality Criterion I: Minimizing the Costs of Making International Transactions 37315.2 Optimality Criterion II: Long-run Inflation Stabilization 37715.3 Optimality Criterion III: Short-run Macroeconomic Stability 38215.4 Weighing Optimality Criteria 38915.5 Summary 391Part 4 International Monetary Cooperation 39516 The International Financial Architecture 39716.1 The International Monetary System after Bretton Woods 39916.2 The International Debt Crisis 40016.3 Changes in the International Macroeconomic Environment in the 1990s 40416.4 Proposals for Reforming the International Financial Architecture 40916.5 Summary 41417 G-8 Policy Coordination 41617.1 Why Coordinate? Theory 41717.2 Comparative Statics 42617.3 Post-Bretton Woods International Policy Coordination among the G-8 Countries 43017.4 The US Current Account Deficit in the 2000s 43517.5 Summary 43818 Monetary Unification 44118.1 Economic Integration in Western Europe 44218.2 European Monetary Integration 44618.3 Monetary Union in West Africa 45318.4 The Eastern Caribbean Currency Union 45718.5 Summary 460Part 5 The New International Macroeconomics 46519 Intertemporal Issues in International Macroeconomics 46719.1 A Simple One-Good Model 46819.2 A Two-Good Model 47619.3 Introducing the Government 48019.4 Summary 485Index 487