International Financial Institutions and Policy

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EC245 International Financial Institutions and Policy
Term Paper Titles
A term paper is mandatory for this module. Details of assessment are contained in the Undergraduate Economics Handbook. Be sure to read the sections on A Guide to good practice in assessed work and Making the best of your essays, term papers and projects.
Please submit an electronic copy only of your paper via no later than NOON on Friday, 2 May 2014. The maximum length of the paper is 3,000 words; to be fair to those who stick to the word limit, I will disregard material beyond the 3,000 word mark.
Answer one of the following questions:

1. Explain what is meant by the term global imbalances. In what ways are global imbalances (a) unusual in historical perspective, and (b) undesirable? Assess the argument that capital inflows helped to inflate the housing bubble in the United States and elsewhere during the 2000s.
Guidance: Start with a concise explanation of ‘global imbalances’. You then need to explain the trends in the data, if you can by showing a graph or table. Drawing on the readings/lectures, explain what the likely driving force behind the trends you identify may have been, and why we might be concerned about them. To address the final part of the question, you may draw on the S/I diagrams used in lectures to explain how the ‘savings glut’ put downward pressure on global real interest rates; be sure to show you understand these diagrams if you include them! As I stress, it was the interaction between capital flows and weaknesses in the financial system that contributed to the bubble and the eventual crisis.

References for getting started:
a) King, Mervyn. “Global imbalances: the perspective of the Bank of England”. Speech, 2011. Available on ORB at:
b) Obstfeld, Maurice and Kenneth Rogoff. “Global imbalances and the financial crisis: Products of common causes”. Available on ORB at:
c) Rajan, Raghuram G. Fault Lines. Princeton, 2010. Chapter 3 in particular. Online preview available at:
2. What is the ‘exorbitant privilege’ enjoyed by the United States in the international monetary system (IMS)? Assess why the sub-prime crisis of 2007-9 did not dislodge the US dollar as the preeminent global currency.
Guidance: To get started, explain why the US being able to pay international bills in its own currency confers an advantage to it. Give some quantitative guidance for the US dollar’s importance in international transactions, and comment on the extent to which the euro (or
Roland Meeks
EC 245
other currencies) are or have been used. The role of official reserves is particularly important in this discussion. To answer the second part of the question, you need to think about why the flaws in the US financial system that were exposed might have led investors to think dollars were not a desirable reserve asset (and explain what those flaws were). You could argue that investors did not sell dollars because: flight-to-safety effect; problems with the euro (could be discussed at length); because for large holders of US assets, such as the Chinese government, selling dollars would have been self-defeating; or any other reason you can think of.
References for getting started:
a) Eichengreen, Barry. Exorbitant Privilege: The Rise and Fall of the Dollar. Oxford, 2010. Online preview available at
b) European Central Bank. The International Role of the Euro. July, 2012. Available at:
c) Rajan, Raghuram G. Fault Lines. Princeton, 2010. Chapter 7 in particular. Online preview available at:
3. Explain with example(s) of a country (or countries) known to you what is meant by sovereign default. Explain the costs and benefits to a country of defaulting on its external creditors, and so when such a default becomes more likely. What are the advantages and disadvantages of a bailout by international financial institutions?

Guidance: The first part of the question is straightforward to answer, and there are many possible candidates to choose from (don’t spend too long on this part). For the second part, do highlight that default is a choice made by policymakers (rather than a technical insolvency), trading off disadvantages (exclusion from capital markets; effect on domestic financial system; etc) and advantages (shifting debt burden to foreigners, etc.). To explain when default becomes more likely, you could refer to the risk factors we discussed in the context of the LDC crisis. The final section might take up half the essay. Bailouts avoid a sudden rupture that would leave a country unable to make future current transactions; but loans from IFIs come with conditions: usually centered on correcting the lax fiscal policy that created the vulnerability to default in the first place. You might choose to explain the nature of conditionality attached to loans; the importance of the IMF a crisis manager that can coordinate the actions of private creditors to prevent a ‘run’; and the problem of ‘moral hazard’.
References for getting started:
a) Boughton, James. “Silent Revolution: The International Monetary Fund 1979-1989”. IMF, 2001. Available at: See in particular Chapters 7 (Mexico) and 12 (critiques).
b) Fischer, Stanley. “On the need for an international lender of last resort”, Journal of Economic Perspectives, 13(4):85-104. Fall, 1999. Available at:
c) Reinhart, Carmen M. and Kenneth S. Rogoff. This Time is Different. Princeton, 2009. Part II and Ch. 10. Online preview available at:
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EC 245
Finding data you can use in your essay
A common weakness of many of last year’s essays was that they failed to show understanding of the magnitudes of/trends in key variables, such as the current account. The following publications may be helpful to you, if you choose to include data in your term paper:
• World Economic Outlook, Statistical Appendix
•, Markets & Data
• World Bank interactive database
• Books from your reading list, particularly those by Eichengreen, and Reinhart and Rogoff.
You may also use charts from the lecture slides. In all cases, ensure you cite the source of any numbers or charts that you use.

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