Greenspan’s Conundrum (UVA-BP-0492)
In the summer of 2005, Alan Greenspan was faced with a conundrum. Despite a background of rising short-term rates, economic strength, and inflationary pressures, long-term rates had not risen at all. If long rates remained low, economic activity would likely strengthen and create further inflationary pressures. On the other hand, if some new force was depressing long-term interest rates, its removal could spark a disconcertingly sharp increase in rates. Either way, Greenspan would have to get to the bottom of this.

Case Studies on Exchange Rate Determination

Strong suggestion: Before teaching any of the exchange rate cases, first cover the technical note on Exchange Rate Models (below).

Long-Term FX Strategies in 2008 (UVA-BP-0526, pre-release draft)
In 2008 the dollar had been depreciating sharply for a number of years. For longer-term investors such as those in asset allocation, a view of the likely path of the dollar over the next 5-10 years is necessary. Is the dollar likely to continue its decline over the medium- to long-term? Or is 2008 likely to represent a bottom?

FX Strategies in 2008: Dollar v. Euro (UVA-BP-Euro2008Draft)
As Luke Anthony was riding the early morning Metro North train from Grand Central to Greenwich in mid-April 2008, the euro—soon to celebrate its 10th anniversary—dominated his thoughts. After bottoming out at about 0.85 USD/EUR in 2000 and 2001, the euro had since appreciated sharply and recently reached a record of 1.59 USD/EUR. Anthony, an FX strategist at a hedge fund, had to form a view about the likely path of the euro going forward. The evidence was in no way clear cut. Of the traditional factors, some were pointing toward further euro appreciation, but others seemed to favor the dollar. And there were a host of “new” factors his analysts were asking him to consider. Sorting through the evidence would require both relatively standard thinking about forex markets and the more recent emphasis on prospective capital flows.

FX Strategies in 2006: Dollar v. Yen (UVA-BP-0505)
Riding the early morning Metro North train from Grand Central to Greenwich on April Fool’s Day 2006, Luke Anthony briefly pondered the revitalization of some of the once grand Harlem neighborhoods.  But then his thoughts turned back to the task at hand: to form a cohesive view of the likely path of the Japanese yen. Was the dollar on one of its patented upward swings that would bring it to 140 ¥/$ before long? Or is the past year’s dollar appreciation just a brief pause in a longer-term downward march as the record current account deficit drags it to the depths?
Teaching Note

Inflation Targeting in South Africa (UVA-BP-0507)
Tito Mboweni was troubled. After a long debate, and not without controversy, South Africa had formally introduced a policy of inflation targeting (IT) on 23 February 2000, just 6 months after he had been appointed Governor of the South African Reserve Bank (SARB). He knew IT was the best path for South Africa, but now, in December 2001, re-reading the latest statistics brought him great concern. Since implementing the IT regime, the economic data had been very disappointing. Persistently high unemployment, with some estimates putting it as high as 40%, meant that South Africa did not have the luxury of waiting for new policies to bear fruit. Mboweni knew that to reduce unemployment the country needed sustainable growth, and that would come only through strong increases in productive capacity, but investment was lagging and it was clear that the seeds for sustainable growth were not being planted. With inflation forecasted to exceed the mandated target, Mboweni would have to tighten monetary policy, which would further restrict investment. Was it time to change course?
Teaching Note: Available by email
Accompanying Material: Assign the Inflation Targeting technical note (below) if desired, but I usually don't.

Vietnam: A New Tiger Earns its Stripes (UVA-G-0618, pre-release draft)
On January 22, 2008, news of the dramatic turn in U.S. monetary policy took the fun out of the preparations for Tết, Vietnam’s cherished lunar New Year celebration, only two weeks away. Because Vietnam’s currency was linked to the dollar, investors worried that the U.S. Federal Reserve’s historic 75 basis-point cut in rates would destabilize Vietnam’s surging economy. Amid the biggest boom in Vietnam’s history, policymakers were suddenly confronted with very hard choices. What would it take to keep financial markets from faltering? What would it take to maintain the growth that had lifted millions out of poverty? Was it time for significant changes, or was a steady hand what the markets needed most?

Technical Notes

Exchange Rate Models (UVA-BP-0496)
This technical note describes parity conditions (PPP, UIP, and CIP) and a comprehensive model of short-run, medium-term, and long-run exchange rate determination.

A User's Guide to the BOP and IIP (UVA-BP-0523)
This technical note is a primer on balance of payments (BOP) and international investment position (II) data.

The Determinants of Interest Rates (UVA-BP-0489; revised in 2008)
This technical note presents basic definitions of real and nominal interest rates, including a short discussion on how to measure expected inflation; shows how to operationalize the workhorse IS/LM model in order to describe general movements in interest rates; and ends with a short aside on risk premiums.

Yield Curve Basics (UVA-BP-0491)
This technical note discusses risk and term premiums; prominent theories of the yield curve; and how to construct a yield curve. The material here is now folded into UVA-BP-0489.

Inflation Targeting (UVA-BP-0495)
Since 2001, 21 countries have shifted to a monetary policy of inflation targeting.  This technical note defines inflation targeting; discusses how it came about; and analyzes implementation issues and the pros and cons of inflation targeting.

Other Case Studies

Conway, P., and F. Warnock, 1997. Macroeconomic Stability and Income Inequality in Chile. Download 

Warnock, F., and P. Conway, 1999. Post-Conflict Recovery in Uganda. World Bank Institute Case Study Number 37152. Includes teaching notes. Download