INTERNATIONAL ECONOMICS—FINAL EXAM
(3-4 pm, July 25, 2001)
Instructor: Professor Kenichi Ohno
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PLEASE WRITE CLEARLY. Bad handwriting
will be ignored and you will get no points.
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Answer ALL questions. Answer in any
order. Use only TWO official answer sheets. Use only FRONT side
of each answer sheet.
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ALLOCATE SPACE CAREFULLY. Answer
clearly and concisely. Long answers do not guarantee high marks.
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This is a closed book exam. Use your
pen and brain only.
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After the exam, model answers will be
distributed.
Q1.
Explain the gSyndrome of the Ever-Higher Yenh by McKinnon and Ohno (1997).
Q2.
Explain the gScandinavian model of inflation.h
Q3. What
is the puzzle presented by Feldstein and Horioka (1980) and what are the
possible explanations of the puzzle?
Q4.
Discuss the differences between the debt crisis in the 1980s and the Asian
crisis in 1997-98.
Q5.
Discuss the method of currency crisis prediction proposed by Kaminsky-
Lizondo-Reinhart (1998).
Model
answers
(Other answers are often
possible)
Q1. The Japanese yen exhibits a
long-term appreciating trend against the dollar despite its short-term
volatility and medium-term cycles. McKinnon and Ohno attribute this to the US
attempt to (i) push up the yen and (ii) conduct bilateral trade talks, in order
to reduce its trade deficit with Japan. The Bank of Japan resists sharp yen
appreciation in the short run but accepts it in the long run. However, this
policy—triggered every several years—is deemed ineffective since the
fundamental cause of US deficit is domestic saving shortage. Yen appreciation
may not reduce Japanfs surplus because of its side effects (pass-through,
Japanese recession, constraint on BOJ policy, etc.)
Q2. If the tradable sector has
a faster productivity growth than the nontradable sector (as in many
fast-industrializing LDCs), the price of its output will fall relative to that
of nontradables, assuming the two sectors face the same input price (wage).
Suppose tradable inflation is anchored by global inflation. Then, overall
inflation (=weighted sum of tradable and nontradable inflation) will depend on
the relative size of the two sectors and the sectoral productivity growth gap.
This model describes essentially the same phenomenon as the Balassa-Samuelson
effect. [You may use symbols and equations to explain this.]
Q3. In a financially integrated
world, savings and investment need not be correlated within each country since
they are determined by different causes. But Prof. Feldstein and his assistants
found that, in reality, high S countries tended to have high I also, and vice
versa. Possible explanations for positive S-I correlation includes the
following: (i) there is no true financial integration; (ii) the private sector
offsets governmentfs spending (gRicardian equivalenceh); (iii) government
offsets private-sector spending (external balance policy).
Q4. The 1980s debt crisis was a
public-sector insolvency problem. Too much long-term bank loans were made to
finance too many development projects. When global recession and high dollar
interest rates hit, the borrowers became unable to repay. Subsequent debt
rescheduling/reduction eased their financial burden. By contrast, the Asian
crisis was a private-sector overborrowing problem, accompanied by unmonitored
capital liberalization. Huge short-term capital inflows created domestic booms
and bubbles, followed by a reversal which left the macroeconomy and financial
sector in paralysis. Crisis contagion and wrong policy responses may have
further worsen the crisis.
Q5. A gcurrency crisish is
defined as a combined exchange rate depreciation and reserve loss. The authors
adopt the signals approach where indicators with high predictive power
are selected and ranked among many candidates. According to their results, the
real exchange rate has the best performance followed by banking crises,
exports, etc. However, if crisis patterns shift or speculators attack for
non-fundamental reasons (such as herding), good performance in the past may not
guarantee high predictability in the future.