Public Affairs 854 Spring 2013 - Term Paper Assignment

The term paper assignment requires the submission of a 15-page paper.

It might be helpful in structuring this paper to pretend that you are a senior staff member at the U.S. Treasury Department, and you are writing this as a memo to the Assistant Secretary of Treasury for International Affairs to give him/her background on one of the topics outlined below.

The memo should be structured as follows:

1. Brief introduction and current situation

2. Analysis

3. Policy options (with analysis of likely outcomes) and recommendations

The memo should also incorporate informational graphs (with data) and tables if useful. Analytical graphs (such as supply and demand figures) are not typically used in memos.

Since it is not usually standard practice to "cut and paste" tables and graphs from other documents into official memos, you should strive to generate your own graphs and tables. Data sources are located on the course website, as well as on campus (Data and Information Services Center in the Social Sciences Building, http://www.disc.wisc.edu/ http://www.disc.wisc.edu/).

In addition, follow the usually conventions: include page numbers, label sources for tables and graphs, and list references.

You should feel free to consult certain weblogs (Econbrowser, WSJ RealTime Economics, CBO Blog, Economists View blog), to get ideas and links to documents, but do not cite weblog posts as references.

Also, do not cite lecture notes.

The evaluation of the paper will be based upon the following:

1. How well is the paper organized, and how clear it is in terms of exposition.

2. How well the situation is summarized (including the use of statistics and graphs).

3. How well models are used to analyze the situation.

4. How well your policy recommendations fit in with the analysis you present.

Topic 1: Consolidating the Recovery

Given the mixed nature of the world economic recovery, and the threat of rising oil prices, discuss the options that face U.S. policymakers, in terms of fiscal, monetary and other policies.

The paper should address the following questions:

1. How robust has this recovery been?

2. Is there a threat of surging inflation?

3. What are the policy options available for accelerating growth?

4. Be sure to address the implications of your policy recommendations for output, unemployment, interest rates, as well as inflation and the trade balance.

There are many sources for this topic. I suggest you consult the links on the course website. In addition there are materials on the IMF, the Federal Reserve Board (and the Federal Reserve Banks), the OECD and CBO websites, among others.

You might find some of the readings for this course of use: http://www.ssc.wisc.edu/~mchinn/web974_f12.html

Topic 2: Yuan "Misalignment"

The Chinese exchange rate (called the "yuan", or sometimes the "Renminbi") has been a contentious issue over the past several years, especially against the context of a wide bilateral trade deficit. However, over the past year, the Chinese trade balance has shrunk considerably.

In your memo, you should discuss the following issues:

1. The effect of the current value, and trajectory, of the Yuan on the US and world economies.

2. The theoretical arguments for changes to the Chinese exchange rate regime, including accelerated revaluation and/or allowing a free float.

3. The implications for the US economy of such changes. Will a more rapid change in the bilateral exchange rate necessarily change the overall US trade deficit? Will the dollar necessarily weaken against the yuan if China goes on a free float? What would be the implications for the ability of the U.S. government to borrow?

4. The possible consequences for the Chinese economy, and the other economies in the region (Japan, Korea, Thailand)

Topic 3: The IMF and Emerging Market Crises

The emerging market crises, including the East Asian crises of 1997-98, and more recently the Argentine experience, have provoked a lot of thought and research. Here I want you to focus on what we have learned from these crises about the role of the IMF:

Was the response by the International Monetary Fund appropriate? What lessons can the IMF learn for how to respond to crises in the future? Is there a case for diminishing the role of the IMF and building some sort of new international financial architecture to deal with crises?

Your main readings for this paper should be Chapter 24 of our textbook as well as Blustein, Paul, 2001, The Chastening (Public Affairs) as well as his 2005 And the Money Kept Rolling In (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (Public Affairs).

Your paper should try to address these questions:

1. How was the IMF response to the crisis Argentina different from what it recommended in the East Asian crises?

2. Why were the stabilization packages for Argentina unable to prevent a default?

3. How might the crisis have played out if there were no IMF or global financial institution? Would there even have been a crisis?

4. Within its existing framework, what could the IMF do better?

Here are some suggestions for further reading:

• Roubini, Nouriel and Brad Setser, Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies (Washington, DC: Institute for International Economics, 2004).
• Peter Isard, Globalization and the International Financial System: What's Wrong and What Can Be Done? (Cambridge, Cambridge University Press, 2005).
• Reports of the Independent Evaluation Office of the IMF: http://www.imf.org/external/np/ieo/index.htm.

Topic 4: Emerging Market Responses to Capital Inflows

In the wake of the global financial recession, a two speed world economy developed, with emerging market economy growth far outpacing advanced economy (US, Japan, Eurozone) growth. As a consequence, capital flows to emerging market economies surged.

Your main readings for this paper should be Chapter 24 of our textbook, as well as various readings from the IMF's World Economic Outlook. This paper by Chinn, Eichengreen and Ito (2012) might also be useful: http://www.ssc.wisc.edu/~mchinn/Rebalancing_Global_Growth.pdf

Your paper should try to address these questions:

1. How should emerging market economies respond to capital inflows (if they should at all) with monetary, fiscal and exchange rate policies?

2. Are capital controls a useful adjunct to conventional policies in stemming capital inflows, and/or changing the composition of those flows? Should they be used to prevent capital outflows?

3. What has been the record of using these measures in the past five years?

4. How do measures in the advanced economies (unconventional monetary policies, austerity) complicate the management of emerging market economies?