COURSE MANUAL

INTERNATIONAL MONEY AND FINANCE

2018-2019

1. General information
Course
International Money and Finance (IMF).
Code 6012B0452; course load: 6 EC; taught in English.

Time and location

See the UvA website. Please note that the re-exam is much after the end of the course.
The correspondence between the calendar weeks used on the website and the course week indicators
below is as follows. Note that one cycle (lecture – tutorial – lecture) typically covers two weeks.
Moreover, the tutorials of one cycle normally cover two weeks; e.g., the Friday tutorials in week 1 are
the same as the Monday tutorials in week 2.
Week 1 2 3 4 5 6 7 8
Calendar week 44 45 46 47 48 49 50 51
Dates Oct 29 Nov 5 Nov 12 Nov 19 Nov 26 Dec 3 Dec 10 Dec 17
-Nov 2 -9 -16 -23 -30 -7 -14 -21

Teachers
 F. Klaassen (lectures and overall coordinator)
Office E3.66, tel. 020-5254191, e-mail: f.klaassen@uva.nl
Office hours: by appointment.
 K. Haasnoot (tutorial groups 1,5,7,9, and tutorial coordinator)
Office E3.61, tel. 020-5257422, e-mail: c.w.haasnoot@uva.nl
Office hours: by appointment.
 I. Neamtu (tutorial groups 4,6,8,10,12)
Office E3.22, tel. 020-5258572, e-mail: i.neamtu@uva.nl
Office hours: by appointment.
 E. Pröhl (tutorial groups 2,3,11)
Office E3.65, tel. 020-5254118, e-mail: e.proehl@uva.nl
Office hours: by appointment.
2. Course overview
Outline
International Economics is concerned with economic relations between (inhabitants of) different
countries. Particularly for small and open economies, such as the Netherlands, these relations are very
important.
This course focuses on the monetary and financial parts of those relations, and thus complements
the International Trade & Investment course. The main topics to be discussed are: the foreign
exchange market (spot and forward transactions), the balance of payments, international capital flows,
the effects and determinants of exchange rate changes, empirical evidence on theories of exchange rate
determination, the international monetary system (history, current situation, proposals for the future),
the IMF, international economic policy coordination, EMU, debt crises and currency crises.

Final attainment level

This course contributes in the following way to the curriculum. First, the course elaborates on the
functioning of the foreign exchange market, so that students obtain a better understanding of the
functioning of markets in general. Second, the course contributes to the comprehension of
international economic relations, because it pays attention to the theory and practice of international
monetary economics. This also helps further understand macroeconomic relations and monetary
economics. Third, because the central variable in the course is the exchange rate, the course
automatically deals with problems of international finance and investments of international
corporations. Fourth, as we aim for true understanding, after the course students will find it easier to
assess economic issues, particularly those involving international dimensions. Finally, the requirement
to do some tasks in groups contributes to the ability to work as a team.

Prerequisites
The course requires a basic understanding of macroeconomics and monetary economics. The course
catalogue lists the entry requirements. The first-year course Macroeconomics 1 is recommended, and
the second-year course Money and Banking is recommended but not essential. To learn more about
those courses, please see the required literature of them. Some elementary knowledge of mathematics
(mainly logarithms and differentiation) and statistics (random variables, expectations operator,
regression analysis) is assumed, but both are not essential for passing the course.

Course material
 Pilbeam, K. (2013), International Finance, custom edition for the UvA - fourth edition, ISBN
978-1-137-34657-5, Basingstoke (UK): Palgrave MacMillan, but only the chapters below.
This UvA edition differs fundamentally from the standard edition in Chapters 1 and 7.
 All material on Canvas.

Teaching program
The following chapters of the book are discussed in the lectures, accounting for the notes at the bottom
of the table:

Week* Subject Chapter

1 Exchange rate, foreign exchange market, and the balance of payments 1+2
2a Balance of payments and interaction with forex market 2+3
2b Relevance of exchange rates for economic policy 4
3a Purchasing power parity and monetary models of exchange rate determination 6+7
3b Monetary models of exchange rate determination 7
4 Monetary models of exchange rate determination, and the risk premium 7+8
5a Risk premium and empirical evidence on exchange rates 8+9

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 5b Empirical evidence on exchange rates, and the pros and cons of exchange rate 9+10
systems
6a Pros and cons of exchange rate systems, practice of exchange rate policy, and 10+11+14
international policy coordination
6b International debt crises and European monetary integration 15+16
7a European monetary integration 16
7b Discussion of trial exam --
*
a(b)=first (second) lecture in week.
The following sections are not compulsory for the exam: 1.10, 2.11, 3.5-3.9, 7.12, 7.14-7.16, 10.5-
10.10, 15.11. The same holds for the following sections, but the remarks in the lectures (on the slides)
about them are compulsory: 4.4-4.6, 8.4-8.15, 9.6-9.13, and 15.14.

Preparation
It is important for students to read the texts before the lecture, so that it becomes easier to understand
the lectures, ask relevant questions, be better prepared for the tutorials, and make the most out of all
feedback provided. Students are expected to solve the problem sets before each tutorial, so that they
can ask specific questions during the tutorial and explain the answers to fellow students. It is
very important to not fall behind.
The course material requires repeated attention so that in the end you will really understand the
material, get a good exam grade, and benefit from the obtained knowledge thereafter.

3. Set-up of lectures and tutorials

Lectures
Lectures last for two hours each, and there are normally two lectures each week. Both lectures have
the same structure. The theory is sketched in broad outlines, the various elements of the literature are
related to each other, difficult parts are discussed in greater detail, and students get feedback. The
theory is motivated by and applied to past and recent events.
Student evaluations in previous years have shown that it is not easy to understand the material
and that the solution to this is to
study the relevant literature before the lecture.
Even though this seems trivial, each year it turns out to be very important. Of course, during the
lecture one may ask questions about the material presented. The lecture is certainly not meant to be a
monologue by the lecturer; active participation by the students is strongly encouraged. There are no
lecture recordings.

Slides
The slides used in the lecture are a key part of the course material, so study them carefully. They
are not just notes useful during the lecture, but I have tried my best to offer a guideline for students, to
help structure the theory, and to understand the essential step-by-step mechanisms at work.
The slides are available at Canvas before the lecture. Some slides have been hidden in the
PowerPoint file to avoid losing time in the lecture, or because they contain material that one can better
study after understanding the basics. Hidden slides are also part of the course material.

Tutorials
Tutorials last for two hours each, and there is normally one tutorial each week. Each student
participates in one tutorial class and has chosen a particular class when registering for the course. In
the unusual case that a student wants to change classes, the request is handled at the first lecture or
first tutorial, so not by email. If because of a pending request in the first week you are not yet sure in
which class you are, just go to the tutorial class of your choice. In line with UvA rules, student
recordings are not permitted.

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 The goal of the tutorials is to obtain a better understanding of the theory by solving problems,
discussing real-life events, and by student explanations of theory and problems, with intensive
feedback, called the continuous exam (see appendix for clarification). We pay special attention to
structured economic reasoning in order to fully understand the argument behind a claim; this is
essential for applying the knowledge obtained in the course to other practical real-life situations. The
problems and solutions will be made available through Canvas before each tutorial. Several problems
are linked to real-life economic events, for instance, by short articles that can be downloaded from
Canvas. There are also exercises for self-study (during tutorial or outside class): they enhance
understanding but are not essential for passing.

Group formation
The students within a given tutorial class have to form numbered groups of four (or five) persons for
the continuous exam. The groups will be determined at the first tutorial, and students can indicate their
group preferences on registration lists at the first lecture and the start of the first tutorial. Further
information will be given at the first lecture.

4. Examination and grading

There is no midterm exam. Apart from the continuous exam grade, the only other input for the overall
course grade comes from the exam.

Exam
The exam (first exam or re-exam) is a written and closed-book exam of 2.5 hours consisting of
multiple-choice and open questions, both in English. The use of a dictionary is not allowed. We try to
avoid difficult words in the exam, and if a student nevertheless needs a translation of a term, then we
will provide such a translation. Experience from previous exams shows that students have virtually no
difficulties with the words used at the exam.
The questions are based on the course material described earlier (so including book, slides,
and exercises) and the issues discussed at the lectures and content tutorials. There will be no questions
on the supplementary articles (mainly from The Economist) discussed at the tutorials.
One representative exam, including answers, will become available through Canvas in due
course. It gives an indication of the types of questions that students can expect at this year’s exam, the
exam format, and the rules that apply.

Suggestions for studying for the exam

 Even if you have a good grade for the continuous exam, please do not underestimate the
effort required to obtain a good grade for the exam.
 Use the slides besides the book. The slides are a guideline to indicate what parts of the book I find
important and they help structure the material. Particularly the slides with the red banners are
important. The slides are also intended to clarify the difficult issues. See also the course overview
slides presented at the beginning of the first lecture.
 The slides cannot cover everything. The rest should be studied yourself. Because that concerns the
relatively easy parts, we expect no problems there. Still, it is not necessary to study details such as
the Second Amendment of the IMF discussed in section 11.7, obviously.
 Focus on the economics behind concepts. Learning formulas, graphs, or other mechanical
arguments is certainly not enough. For instance, uncovered interest parity can be written down in a
simple formula, but a true economic understanding is far from easy.
 Using symbols and arrows facilitates studying the step-by-step economic argumentation. Exploit
the list of symbols on Canvas.
 The continuous exam bullets will help you find out what is important, understand the economics
underlying formulas and graphs, and avoid making some common mistakes. Exploit those bullets.
 The tutorial exercises are meant to further clarify and investigate some difficult concepts. They
complement the book and slides, so you should study all three to achieve good understanding.
 The key tests for true understanding:

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 o Can you come up with a complete economic argumentation yourself in which you truly
understand each and every step?
o Can you analyze cases not explicitly covered by the material?

Overall grade
The computation of the overall grade is the same for the first exam and re-exam. The overall grade is
the weighted average of
 grade for the exam (weight 80%)
 final grade for the continuous exam (weight 20%),
with the following condition. If the (unrounded) grade for the exam is below 5 or if the grade for the
open questions at the exam is below 3, the overall grade is the weighted average maximized at 5, thus
implying a fail.

Issues beyond this course manual

The coordinator will decide in cases not dealt with by this course manual.

Appendix: continuous exam (CE)

Continuous exam means student explanation of theory and problems, with intensive feedback
We realize that this assignment is new to you. The text below will help you understand it, and in the
first week we will further clarify it and answer your questions. It starts in the second week.
Student groups have to explain part of the theory or problems to fellow students during the
tutorial. The presenting group will talk for about 10 minutes, interrupted by questions. There is also a
plenary discussion, where the presenters ask at least one question to the students in the audience, and
the latter are strongly encouraged to ask questions as well. This will also take about 10 minutes.
Presenters and the other students get feedback from each other and the tutor. This is one of the
key benefits of the assignment. It is like continuous examination with immediate feedback. The better
your preparation, the better the feedback, the more valuable the feedback is to you, and the better you
will understand the concept.
The main goal is to identify difficulties in the concepts and resolve them as the course runs.
This way we obtain true understanding of them and avoid that students only after the exam realize that
they do not fully understand a concept. For instance, a seemingly simple formula like covered interest
parity already turns out to be difficult to fully understand. Hence, the CE is an important part of the
course. The other goals of this activity are to stimulate preparation during the course, and to make
students aware of the fact that superficial understanding of the course material is not enough for
passing. In the end, the continuous exam will help provide better answers to the questions at the exam
and thus pass the course.
The explanation has to be done in a structured way, using step-by-step argumentation. The
main point is that you have to show that you really understand the concepts. It is not allowed to simply
reproduce the slides and solutions during the explanation, though it is allowed to use own notes. The
presenters have to write on the whiteboard; using PowerPoint is not recommended.
The topics involved will be indicated by about two bullets at the top of the problem set of each
tutorial. Only the bulleted topics have to be explained, not the remaining exercises; one group explains
one bullet. One can think of a summary of the lecture and how it relates to the course so far (helicopter
view), or explaining some specific lecture slides, or a particular part of the problem set. For example,
the bulleted topic could be: “Covered interest parity (CIP) (concept, equilibrium restoration, etc., so
about 4 lecture slides).”

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 The explanation is in group form. All students in the group have to participate, though they
may have different roles. For instance, some students could start the explanation, while others answer
the questions.
Good preparation is of the essence, so a CE-bullet will only occur sometime after the CE-topic
has been discussed at the lecture and tutorial (this delay also helps the persistence of what you have
learned). Use the slides, problem sets, and the book to prepare. All students in a group have to
prepare all bullets, so the group should not let part of the group work on one bullet and part of the
group on the other bullet, as that would go against the goal of the CE. Discussion before the tutorial is
strongly encouraged, both within and between groups, because explaining theory to fellow students
and obtaining immediate feedback helps pinpoint difficulties and find solutions. Given the early
availability of the required material, there should be enough time for such pre-tutorial interaction.
After the last lecture before a tutorial, students cannot ask the teachers about the CE-bullets of
that upcoming tutorial. That is, any remaining difficulties should be brought up at the tutorial, so that
all fellow students benefit from the resulting discussion.
The groups that have to present are selected randomly, so as to stimulate that each group
prepares for all tutorials. If less than two persons of a group are at the tutorial, another group is
selected. A group can be selected more or less than once during the course. Given the limited amount
of time, it is inevitable that several groups cannot present at a specific tutorial, although they have
prepared for it. But even then the preparation is useful, as it allows group members to pinpoint
difficulties, get feedback and a better understanding of the material, ask questions, and the preparation
also reduces the time spent on studying for the exam.
The assessment is based on the correctness of the exposition, its clarity, the answers to
questions from the audience, and related items. Given the availability of the material (slides, answers
to problems), the quality of the explanation and hence the assessment mainly depends on the extent to
which the group has a precise and complete understanding of the economic mechanisms at work:
superficial understanding is not enough.
The grade for each explanation is between 0 and 10. Only the members of a selected group
who participate in the explanation get this grade; absent members and students who do not want to
participate get a 0. If too few students of a group are at the tutorial, the present members get no grade,
but the absent members get a 0. The teacher can assign different grades across presenters if necessary,
but this will happen only in unusual cases. In the tutorial where the continuous exam takes place for
the first time, the presenters will be assessed in a milder way, as they have not been able to learn from
earlier instances.
The final CE-grade is derived from the presentation-specific grades as follows. For students
who did not present, the final CE-grade equals the exam grade; for students who presented once, the
final CE-grade is half the presentation grade and half the exam grade; for students who presented more
than once, the final CE-grade is the average of all presentation grades. The grades become available as
soon as possible after the last tutorial. They become invalid as soon as the last re-exam of the current
course has been completed. Grades from previous years cannot be re-used.
Hardship clause. It is difficult to make rules that cover all cases. Therefore, when determining
the final course grade after the exam, we will check whether the CE-grade has led to unreasonable
consequences. After all, the continuous exam is a means to improve understanding and intended to
help, not to harm you. For instance, consider a good student obtaining a low grade because of a bad
performance of fellow group members. In such a case we will come up with a reasonable solution if
we think that this is needed. You will never receive a lower grade because of this discretion. Please
note that we take a look at all grades ourselves; it is thus futile to contact us concerning this.