Open Economy Macroeconomics in Developing Countries

This rigorous and comprehensive textbook develops a basic small open economy modeland shows how it can be extended to answer many important macroeconomic questions that arise inemerging markets and developing economies, particularly those regarding monetary, fiscal, andexchange rate issues. Eschewing the complex calibrated models on which the field of internationalfinance increasingly relies, the book teaches the reader how to think in terms of simple models andgrasp the fundamentals of open economy macroeconomics.

After analyzing thestandard intertemporal small open economy model, the book introduces frictions such as imperfectcapital markets, intertemporal distortions, and nontradable goods, into the basic model in order toshed light on the economy's response to different shocks. The book then introduces money into themodel to analyze the real effects of monetary and exchange rate policy. It then applies thesetheoretical tools to a variety of important macroeconomic issues relevant to developing countries(and, in a world of continuing financial crisis, to industrial countries as well), including the useof a nominal interest rate as a main policy instrument, the relative merits of flexible andpredetermined exchange rate regimes, and the targeting of "real anchors." Finally, thebook analyzes in detail specific topics such as inflation stabilization, "dollarization,"balance of payments crises, and, inspired by recent events, financial crises. Each chapter includesboxes with relevant empirical evidence and ends with exercises. The book is suitable for use ingraduate courses in development economics, international finance, and macroeconomics.

Carlos A. Vegh is Professor of Economics at the University of Maryland and a Research Associate at the National Bureau of Economic Research.