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  Slides for Chapter 10:Aggregate Demand Shocks and the Real Exchange Rate International Macroeconomics  Schmitt-Groh´e Uribe Woodford Columbia UniversityApril 17, 2018 1  International Macroeconomics, Chapter 10   Schmitt-Groh´e, Uribe, Woodford Motivation ã  The Balassa-Samuelson model emphasizes technological factorsaffecting the real exchange rate. A country becomes more expensiverelative to others when it the difference in technical progress in itstraded sector relative to its nontraded sector is larger than in theother countries. Because technological progress occurs slowly overtime, the model is best suited to understand long-run movements inthe real exchange rate. ã  However, real exchange rates, also experience sizable movementsin relatively short periods of time, which are unlikely to be due tochanges in technologies. ã  An example of such episodes is given by  sudden stops  , to whichwe turn next. 2  International Macroeconomics, Chapter 10   Schmitt-Groh´e, Uribe, Woodford Sudden Stops A sudden stop is a situation in which a country that is runningcurrent account deficits, that is, is borrowing from the rest of the world, experiences a sudden and large increase in the cost of external borrowing. Foreign lenders either start charging a muchlarger country premium or stop lending altogether. As a result,the current account reverts quickly from deficit to surplus, as thecountry is cut from international financial markets.In addition sudden stops are characterized by sharp depreciations of the real exchange rate (the country becomes suddenly much cheaperrelative to other countries) and by severe contractions in aggregateactivity (collapses in output, consumption, and investment). 3  International Macroeconomics, Chapter 10   Schmitt-Groh´e, Uribe, Woodford Case Study: The Argentine Sudden Stop of 2001 At the end of 2001, Argentina suffered a crisis that had all the signsof a sudden stop.In the second half of 2001, foreign lenders begin in increase theArgentine interest rate premium to extremely high levels. In Decemer,Argentina defaults on its foreign debt, which leads to a cutoff frominternational capital markets.The following slides look at what happened to the interest-ratepremium, the current, output, and the real exchange rate aroundthe Argentine Sudden Stop of 2001. ∗ ∗ All graphs are taken from: “The IMF and Argentina, 1991-2001,” prepared by ateam headed by Shinji Takagi, Washington, D.C.: International Monetary Fund,Independent Evaluation Office, 2004. 4
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