Centre for Financial & Management Studies (CeFiMS) - University of London

Individual Professional Courses – IPC  

International Finance [FE102]

Introduction

International Finance is concerned with the institutions of international finance and the key policy problems that have arisen in recent decades. It presents a policy-oriented perspective, similar to that an economist would use when advising governments on how to work within the modern international financial system and how to overcome its problems.

Aims & Objectives

This course aims to familiarise students with the three key concepts necessary for understanding the problems of policy formulation within the international financial system:

• the institutional structure of the modern international financial system
• the principles of financial policy analysis for an open economy
• the principles affecting some current policy issues in international finance.

Resources

Students receive a looseleaf binder containing eight ‘course units’; these texts are carefully structured to provide the main teaching and are equivalent to traditional course lectures, defining and exploring the main concepts and issues, locating these within current economics debate and introducing and linking the further assigned readings. Two obligatory assignments, which are marked by your CeFiMS tutors, and a specimen examination paper are also included within the student pack, along with the following:

Textbook:

Keith Pilbeam, International Finance, EDI Series in Economic Development, Second edition 1998, Macmillan, ISBN0333730976.

Readings:

A compilation of further readings: recently published articles or seminal writings which augment and illustrate the main text.

Course Timetable:

This shows the linkage between the various components of the course and indicates the schedule for reading the texts, submitting assignments, etc.

Course Content

Unit 1 Evolution of the International Financial System

The historical development of the modern system of international finance is examined in this unit of the course with the focus on the period from 1944 to the present. In this introduction to the institutions of international finance, the following concepts are considered:

• Bretton Woods System
• Eurodollar System (and other Eurocurrencies)
• International Debt Crisis
• Fixed Exchange Rate System
• Floating Exchange Rate System.

Unit 2 Foreign Exchange Markets

This unit looks at the institutional framework of international finance, examining particularly theories of the foreign exchange market, the most basic, universal market institution within the international financial system. Models of exchange rate determination are considered, including Purchasing Power Parity and Covered Interest Parity, and the importance of the links between foreign exchange markets and money markets is raised.

Unit 3 The Balance of Payments

Unit 3 explores the meaning of the balance of payments and analyses the effect of government policies on the balance of payments using three theoretical frameworks: the National Income or multiplier approach, the elasticity approach and the absorption approach.

Unit 4 Balance of Payments Policies

The Mundell-Fleming Approach

The Mundell–Fleming Approach is introduced in this unit, and its usefulness in analysing the effects on the balance of payments of macroeconomic policies is evaluated. The unit examines the equilibrium effects of fiscal and monetary policies under fixed and under floating exchange rates; and it questions the effects of capital mobility in the world economy.

Unit 5 Balance of Payments Policies – The Monetary Approach

This unit introduces a monetary model of the balance of payments developed a decade after the Mundell–Fleming model: the Polak model, which concentrates on control of the money supply as the only instrument of macroeconomic policy. The three basic assumptions of fixed velocity of money, fixed supply of output and purchasing power parity of the monetarist approach are examined, and the important debates which the approach has inspired are also studied.

Unit 6 Fixed and Flexible Exchange Rate Systems

The central question raised in this unit concerns the advantages and disadvantages of three alternative types of systems: fixed exchange rates, flexible exchange rates and managed exchange rates. The issue is explored through a theoretical analysis of the connections between exchange rate systems and international finance and the mechanisms employed by governments and other authorities for financing foreign exchange intervention.

Unit 7 Currency Blocs, Financial Integration and International Co-ordination

This unit examines the significance of international financial co-operation, focusing on two specific types: Macroeconomic Co-ordination, and Currency Blocs and Monetary Union. It takes the European Monetary System as a case study, comparing its financial arrangements with those of the Bretton Woods System established after the second world war.

Unit 8 Foreign Exchange Problems and Policies of Developing Countries

This unit builds on the foundations laid in the earlier course material by considering the problems of international finance faced by less developed countries, using two main types of models: Capital Flight and Contractionary Devaluation. After examining the structural differences between developing and advanced industrialised economies, including the specific problems of debt overhang, dual exchange rates, parallel foreign exchange markets and currency substitution, students choose one of the two principal models to examine in depth.

Tuition & Assessment

The course is assessed by two assignments and a three-hour examination held in late October or early November. Each assignment consists of compulsory questions or an essay topic, which should be answered, in total, in no more than 2500 words. Assignments count for 30% of the overall grade for this course, while the examination is worth 70% of the final assessment.