International Financial Policy Problems

Final Project

The goal of the final project is for you to have an opportunity both to synthesize the topics we cover in this course and to use the tools you have learned to analyze particular international financial policy problems. In order to do this you will choose data to look at and assess the macroeconomic problems facing a particular country and make recommendations for policies that should be pursued to address these problems. This handout will give you more specific information on how to approach this project and what is expected of you. 

In general, all countries face macroeconomic problems at some times, but different countries confront different problems at different times. One country may have a substantial and persistent current account deficit problem while another has deficits under control but has faced high inflation and currency depreciation for several years in a row. Yet another country may have a depreciating currency as well as high current account deficits. And these issues are clearly not exhaustive of the macroeconomic issues facing many countries today. In the first part of the course we have mainly discussed models that apply best to developed countries. Toward the end of the course we will focus on models that help us better understand some of the macroeconomic issues that arise for developing countries. 

This project is purposely somewhat open-ended since I want you to spend time thinking about which problem(s) to focus on. Some of you may want to write papers on a “topic” rather than a “country.” This is fine as long as the “topic” is in the context of a country analysis. For example, you may want to explore the implications of persistent high current account deficits. You can do this in the context of a country analysis where the major problem you choose to focus on is the current account deficit. However, this project is NOT a research paper. The bulk of the analysis (other than basic data collection) should be your analysis of the macroeconomic situation. The following are specific guidelines that should help you get started. 

1. COUNTRY: projects should analyze one country during a time period in which it experienced a macroeconomic problem. It is fine to study a country that was able to avoid a full-blown crisis, as long as you focus on a period in which the country faced substantial internal or external macroeconomic shocks that you are able to identify in the data. If you find it helpful to compare the experience of your chosen country against another country (that is similar, or geographically nearby) you should feel free to do so. 
2. DATA SOURCES: You will need to get macroeconomic and financial data in order to analyze what has been going on in your chosen country and to see what policies have been tried and which have worked and have not worked. The “International Financial Markets Databases” page of our Canvas site describes and provides links to a number of sources of macroeconomic and financial data for a wide range of countries (See the other file for these links). Feel free to also use other online sources for data.

You are welcome to analyze a historical period or the current situation. Either way, you will probably want to look back a few years in order to put the macroeconomic situation into some context. 

What should you look for in these sources? You want to look at many of the types of macroeconomic variables we have talked about in the course, for starters. Once you have made some progress in identifying problems in this particular country, you may want to look for a bit more detail in some areas, but look broadly at first (GDP, interest rates, exchange rates, price level or inflation, unemployment rate, money supply, government spending, etc.).

Two cautions to keep in mind: 

• GDP grows over time, even when the economy is not performing particularly well. This is why we typically look at GDP relative to trend or potential. For most countries, however, you will not have “trend” data, and I do not expect you to be estimating potential output in the process of this project. Since population growth is one of the reasons GDP might grow over time, you may find it helpful to look at GDP divided by population (“GDP per capita”), to get a slightly better sense of how the economy is doing. This still includes some growth of technology, but is worth comparing to plain GDP, at least. Also, if you look over several years of data, you will be able to get a sense of how the economy has been performing relative to its previous history. 
• Remember that because prices change over time, you will need to look at real variables. If the money supply rises and you want to see if that means the AA curve has shifted, you should “deflate” that money supply number by a price index to get the real money supply and see whether that has risen. The same goes for fiscal policy indicators like government spending or tax revenue. There are clearly some complex issues about which price index to use, but the “GDP deflator” is fine for most anything you will be looking at. The GDP deflator is a price index for GDP, which is an index that equals 1.00 in the base year (if you see it reported as equal to 100 in the base year, divide the reported numbers by 100), and then increases as prices go up, and falls as prices fall. Alternatively, the Consumer Price Index (CPI) can also be used.
• OTHER SOURCES: I do not expect this to be a research project in the traditional sense that you would use outside sources. I want you to get the data and think about the macroeconomic problems and propose policies. I do not want you to research other people’s opinions on the state of this particular economy. Of course, if in the process of working on the project you read something relevant, you may want to incorporate it. If so, please cite the reference. The only things you do not need to cite are your class notes and the textbook. You should cite your data sources. The most common mistake made on this project is to use external sources too much. I want the project to reflect your analysis of the data you look at, rather than external writings. Of course, if this is a country you are very familiar with, there will be information you may want to incorporate from personal knowledge. However, keep in mind that you will be graded primarily on your analysis and the strength of the arguments you make.
• THE ASSIGNMENT: The result of your analysis should no more than 5 double-spaced typed pages. Tables and diagrams are not included in the 5-page limit. In particular, your writeup should include the following: 
• macroeconomic performance (what data you looked at and what you found) 
• assessment of highest priority macroeconomic problem or problems 
• recommendation of policy or policies to pursue in order to address these problems 
• discussion of the limitations of these policies.

Clearly a complete analysis of the macroeconomy of a particular country would require much more than 5 pages and a few weeks of work. For that reason, your focus should be somewhat narrow here as you address only one or a few issues in the economy. Your analysis must, however, be internally consistent in the sense that if you are looking at a country in a fixed exchange rate regime, and you propose expansionary monetary policy, you must acknowledge what the problem with that proposal will be. You should refer to particular models that you are using in assessing the recent performance or policies and making recommendations. You can assume that the reader (me) knows the material we have covered in this course, so when you refer to a particular model, you most certainly do not need to (and should not) use any of your 5 pages to present this model.