International macroeconomics and finance deals with the determination of economic and financial aggregates in open economies, linked through international trade in goods and services, flows of labour and capital, and participation in global financial markets.

One fundamental difference between open and closed economies is that open economies can borrow resources from the rest of the world or lend resources to the rest of the world . Thus, in an open economy, domestic investment can differ from national savings. This possibility of transferring savings from country to country is called inter-temporal trade, and is the first main distinguishing feature of international from closed economy macroeconomics. A large part of international macroeconomics and finance deals with the balance of payments, which is associated with this inter-temporal trade. In particular it deals with the financial implications of the balance of payments and with how the balance of payments and its financing affects other macroeconomic aggregates, such as output and employment, economic growth, employment and unemployment, inflation, private consumption and investment, interest rates and wages.

A second key difference between open and closed economies is that the global economy is using several currencies, and not just one. These currencies are issued by national authorities, and not some supranational authority which can impose their use by government fiat. The relative prices of these currencies, exchange rates, are constantly changing in the current international monetary and financial system, and they display high volatility. Fluctuations in exchange rates affect all macroeconomic aggregates. A large part of international macroeconomics deals with the determinants and the effects of changes in exchange rates, and the pros and cons of alternative exchange rate regimes.

A third issue, related to the second, is that some currencies are more equal than others in the international economy. Since the use of international currencies cannot be imposed by government fiat, only a few currencies, such as the dollar, and to a lesser extent, the euro and the yen, are widely acceptable in international financial transactions. Such currencies, often called international vehicle and reserve currencies. They serve as means of payments, units of account and stores of value, in all international financial transactions, even in transactions between countries other than the country issuing them. This feature, which creates asymmetries in the international monetary system, is also a key concern of international macroeconomics and finance.

A fourth key concern of international macroeconomics and finance is the structure, role and the implications of international financial markets. In all economies, the role of capital and money markets is extremely important. Capital and money markets allow households and businesses to engage in inter-temporal trade, by exchanging securities of different maturities and with different risk characteristics. International capital and money markets differ from domestic ones in at least three respects. First, the securities traded in international capital markets have been issued in different countries and may be denominated in different currencies. Second, trading in international financial markets is not subject to the same set of rules as the one applicable in national economies. Third, international financial markets display the same asymmetries as those that characterize the international monetary system, in that they are concentrated in a few economies and  trades are carried out through international vehicle and reserve currencies. Interest rates and exchange rates are determined in those international financial markets, which thus connect macroeconomic developments in a particular country with the rest of the world .

The role of international money and capital markets is crucial for the global economy. The volume of transactions in those markets far exceeds the volume of international trade. Critical variables for the global economy, such as interest rates and exchange rates are determined through trading in the international money and capital markets, in which both private enterprises and banks and governments take part.

The distinction between internal and external balance is also central in the field of international macroeconomics and finance. Internal balance is usually defined as a situation of non-inflationary growth and low unemployment. External balance requires a course for the balance of payments and external debt which does not threaten a country’s ability to service its international obligations. There exist important tradeoffs between internal and external balance. Because the mechanisms that determine the nature of economic interactions in open economies, such as the rules and institutions of the international monetary and financial system, vary between historical periods, the tradeoffs between internal and external balance may also differ across periods.

A large part of international macroeconomics and finance examines the market forces and policies that result in internal and external balance under different international economic conditions and alternative international financial and monetary systems . The history of international macroeconomics and finance reflects the changing nature of the rules and institutions of the international monetary and financial system, as a result of national and supranational efforts to deal with international economic and financial linkages and external constraints.

This site is dedicated to international macroeconomics and the global economy. It welcomes and hosts interesting and important original analytical articles on international macroeconomic issues, provides links to relevant links and data bases and  highlights interesting books and other publications on international macroeconomics and the global economy.

An Introduction to International Macroeconomics and Finance