Open Economy Dimensions of Stabilization Policy: Capital Flows and Debt Sustainability



Giancarlo Corsetti (University of Cambridge)



10-14 September 2018



9:30 to 13:00

Intended for


Researchers from academic and policy institutions interested in macroeconomics, international macroeconomics, and public finance.



First-year graduate Macroeconomics.



This course introduces researchers to recent advances in the analysis of stabilization policies in economies integrated in world capital markets. The course is organized in two parts. The theoretical core of the first part is a modern reconsideration of two concepts at the heart of international economics, real exchange-rate misalignment and cross-border imbalances, resulting from financial and nominal distortions. We first use models to gain theoretical insight on the economics of inefficient capital flows and the role of the exchange rate to foster efficient cross border relative price and wealth adjustment. Next, we bring theory to bear on the design of monetary policy, deriving a general loss function and optimal targeting rules under commitment. Using the workhorse model of open macro, we will analyze in detail the effects of real and nominal shocks causing inefficient capital inflows (outflows) and over-(under) appreciation of the exchange rate. We will then consider issues raised by global slumps, reassessing the case for exchange rate flexibility when policy rates are at their effective lower bound. We will conclude with a discussion of new directions in open economy modeling. In the second part of the course, we will address issues in debt sustainability, financial and macroeconomic stability, as well as fiscal and monetary interactions in economies where markets price sovereign risk. This part will mostly (but not exclusively) draw on evidence and case studies from the euro-area, bringing forward topics on cross-border policy cooperation in the design of cross-border facilities and official lending institutions.



Capital flows
Local-currency price stability of imports
Monetary Policy trade-off raised by misalignment and external imbalances
Monetary stabilization in response to inefficient capital inflows
The zero lower bound problem: open economy dimensions
Sovereign risk and stabilization policy
International cooperation and the role of official lending

Sponsored by


Autoridad Independiente de Responsabilidad Fiscal (AIReF)


Giancarlo Corsetti is Professor of Macroeconomics at Cambridge University, fellow of Clare College and director of the Cambridge INET Institute. He previously held the Pierre Werner Chair at the European University Institute in Florence, and taught at the Universities of Rome III, Yale and Bologna. He is a leading scholar in international economics and open macro with pioneering contributions on currency, financial and sovereign crises, monetary and fiscal policy in open economy, and the international transmission and global imbalances. He is a consultant at the European Central Bank, the Bank of International Settlement, and the Bank of England, and a regular visiting professor in central banks and international institutions. He is research fellow of the Centre for Economic Policy Research.


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