International Finance

The emergence of an open, liberal international financial order has been one of most notable developments in the global economy in the last 20 years. The growth of a more open international economy since the Second World War produced an international environment in which markets have bypassed national regulations, and financial flows have seriously questioned the Keynesian demand management policies. The study of trade and production cannot, therefore, satisfactorily explain the behaviour of the international economy; finance and the institutions through which it flows should also be examined. In a world where consumption, production and investment are globalised, international finance has become an integral part of any serious academic study of international economics.

The main objective of this module is to study the economists' perspective on international finance, which is a policy-oriented perspective. The examination of the institutions of international finance and the key policy problems that have arisen in recent decades are the main concern of this module. In other words, it is the perspective that an economist would use when advising governments on how to work within the modern international financial system and how to overcome its problems.

Learning outcomes

When you have completed this module, you will be able to do the following:

• outline the decline of Bretton Woods and the rise of the Flexible Exchange Rate Regime, 1973 to the present
• analyse and discuss fixed versus flexible exchange rate regimes
• explain the difference between hedging, arbitrage and speculation and the interaction of hedgers, arbitrageurs and speculators
• discuss the parity relationships between spot and future exchange rates
• demonstrate how a balance of payments is constructed with a series of transactions, and show how transactions are recorded
• explain how the national income framework and elasticities framework can be linked to the absorption framework
• discuss the policy problem the Mundell-Fleming model is designed to address, and the historical circumstances that made it relevant
• differentiate between the assumptions of the Polak model and those of the Mundell-Fleming model
• assess the strengths and weaknesses of the monetary approach
• relate the traditional arguments for and against fixed and floating exchange rates
• explain the rationale behind discretionary intervention in the foreign exchange market
• give an account of the development of the European Monetary System and the European Monetary Union.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Pilbeam, K (2013) International Finance, 4^th Edition, Macmillan.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Evolution of International Financial Systems

• 1.1 Introduction to Unit 1
• 1.2 Bimetallism – before 1879
• 1.3 Classical Gold Standard – 1879–1914
• 1.4 The Interwar Period – 1914–1944
• 1.5 The Bretton Woods System – 1945–1972
• 1.6 The Flexible Exchange Rate Regime – 1973 Onwards
• 1.7 The Rise of the Eurodollar
• 1.8 The International Debt Crisis
• 1.9 Summary

Unit 2 Foreign Exchange Markets

• 2.1 Introduction
• 2.2 Economic Models and Institutions
• 2.3 Market Institutions and Exchange Rates
• 2.4 A Simple Model of the Spot Exchange Rate
• 2.5 A Theory of Spot Exchange Rates: Purchasing Power Parity
• 2.6 Forward and Spot Exchange Rates: Covered Interest Parity
• 2.7 Parity Conditions Linking Spot and Forward Exchange Markets
• 2.8 Foreign Exchange and Other Financial Markets

Unit 3 The Balance of Payments

• 3.1 Introduction
• 3.2 Measures of the Balance of Payments
• 3.3 The Multiplier Approach
• 3.4 The Elasticities Approach
• 3.5 The Absorption Approach
• 3.6 Summary

Unit 4 Balance of Payments: the Mundell-Fleming Approach

• 4.1 Introduction
• 4.2 The Internal-and-External-Equilibrium Approach to Policy
• 4.3 The Mundell-Fleming Approach: the IS-LM-BP Model
• 4.4 Policies and Events: Shifts of the Three Curves
• 4.5 Policies under Fixed and Floating Exchange Rates
• 4.6 Perfect Capital Mobility
• 4.7 Evaluations of the Mundell-Fleming Model
• 4.8 Evaluation of Perfect Capital Mobility

Unit 5 Balance of Payments – the Monetary Approach

• 5.1 Introduction
• 5.2 Background to the Monetary Approach
• 5.3 Three Assumptions of the Monetarist Theory
• 5.4 The Money Supply Identity
• 5.5 Monetarist Analysis of the Balance of Payments
• 5.6 Evaluation of the Monetary Approach
• 5.7 Conclusion

Unit 6 Fixed and Flexible Exchange Rate Systems

• 6.1 Introduction
• 6.2 The Case for Fixed Exchange Rates
• 6.3 The Case for Floating Exchange Rates
• 6.4 The Modern Evaluation of Fixed and Flexible Exchange Rate Regimes
• 6.5 The Case for Managed Exchange Rates
• 6.6 Finance and the Choice of Exchange Rate Systems

Unit 7 Currency Blocs, Financial Integration and International Co-ordination

• 7.1 Introduction
• 7.2 Types of Financial Co-operation
• 7.3 Macroeconomic Policy Co-ordination
• 7.4 European Monetary Union

Unit 8 Currency and Financial Crises and the International Financial System

• 8.1 Introduction
• 8.2 Modelling Currency Crises
• 8.3 The East Asian Financial Crisis
• 8.4 The 2007–08 Financial Crisis
• 8.5 Financial Innovations before the Credit Crunch
• 8.6 Dimensions and Causes of the Credit Crunch
• 8.7 Policy Responses to the 2007–08 Crisis

Module samples

• M429 Module Introduction (PDF)
• M429 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules