International Financial Policy Course Summary: Essential Concepts Explained

International Financial Policy


June 16, 2025




1

,International Financial Policy


Contents
1 Lecture 1: Introduction 5
1.1 International finance history linked to course topics . . . . . . . . . . . . . . . . 5
1.2 The main actors-International financial institutions . . . . . . . . . . . . . . . . 8
1.3 Recapitulation of prior knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2 Lecture 3: Macroeconomic policy goals and exchange rate regimes 11
2.1 Macroeconomic policy goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Fixed and flexible exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.1 the case for floating exchange rates . . . . . . . . . . . . . . . . . . . . . . 13
2.2.2 the case for fixed exchange rates . . . . . . . . . . . . . . . . . . . . . . . . 14

3 Lecture 4: Mundell-Fleming Model and policy effectiveness 16
3.1 IS-LM-BP model (Mudell-Fleming Model) . . . . . . . . . . . . . . . . . . . . . . 16

4 Lecture 5: Problems of fixed exchange rate regimes 19
4.1 Credibility problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.2 the credibility problem - A Barro Gordon illustration . . . . . . . . . . . . . . . . 24
4.2.1 Barro-Gordon in a two-country setting . . . . . . . . . . . . . . . . . . . . 30

5 Lecture 6: Currency crises 32
5.1 1. The Krugman (1979) Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.1.1 crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.2 The Obstfeld (1986) Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

6 Lecture 7: Rational expectations 40
6.1 Flexible exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

7 Lecture 8: Exchange rates in the real world 41
7.1 economic impact of exchange rate changes for NL . . . . . . . . . . . . . . . . . 41
7.2 actual exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.3 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

8 Lecture 9: Taylor rule, Inflation targeting 44
8.1 inflation targeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

9 Lecture 10: Quantitative easing 48
9.1 What is QE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
9.2 The effectiveness of QE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
9.3 ECB’s response to coronavirus pandemic . . . . . . . . . . . . . . . . . . . . . . . 51

10 Lecture 11: debt problems in developing countries 53
10.1 differences in development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53



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11 Lecture 12: The European sovereign debt crisis 58
11.1 Causes after the introduction of the euro . . . . . . . . . . . . . . . . . . . . . . . 58
11.2 crisis hit countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
11.3 comparing Iceland, Ireland, Latvia, Cyprus . . . . . . . . . . . . . . . . . . . . . . 60
11.4 recent trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
11.5 European banking union as solution . . . . . . . . . . . . . . . . . . . . . . . . . . 61

12 Lecture 13: Financial globalisation 64
12.1 Types of international transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
12.2 efficiency of international goods markets . . . . . . . . . . . . . . . . . . . . . . . 65
12.2.1 Sophistication of financial instruments . . . . . . . . . . . . . . . . . . . . 65
12.2.2 Comparing interest rates based on UIP . . . . . . . . . . . . . . . . . . . . 66
12.2.3 Comparing interest rates based on onshore and offshore interest rates . 67
12.3 developing country borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

13 T2-T4 overview of material 72




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course manual
Grading:

• 80% exam grade (must be 5.5 to pass)

• 20% policy paper (DL: 19 dec) (groups of 2 students)

• 10% bonus assignment (DL: 21 nov) (groups of 3 or 4 students)

• Overall grade must be 5.5




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