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This technical note introduces the basic structure of what we call the Three-Paned Model. The model is essentially just an "opening up" of the closed-economy IS/LM Model, with the main pane being the IS/LM Model (modified only slightly to allow for international trade) and two additional panes that determine the amount of capital inflows, net exports, and the exchange rate. This note is not a substitute for the more in-depth presentation of these models found in textbooks, but should be used to complement each textbook's richer treatment of the theoretical and technical aspects of these models.

Riding the early morning Metro North train from Grand Central to Greenwich in late December 2004, the euro dominated Luke Anthony's thoughts. After bottoming out at about 0.85 $/€, in 2000 and 2001, the euro had appreciated sharply and now stood at 1.35 $/€ (Exhibit 1). Luke, 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 to sift through. Sorting through the evidence would require both relatively standard thinking about forex markets and the more recent emphasis on prospective capital flows. And Luke had only this quiet week between Christmas and New Year's to form a cohesive plan for early 2005.

South Africa had formally introduced a policy of inflation targeting (IT) in February 2000. By December 2001, the governor of the South African Reserve Bank after reading the latest statistics is concerned with the disappointing economic data. Economic activity had slowed drastically, to the point that the country appears to be heading for a recession. The gloomy statistics force the governor to consider whether the country had pursued the right policy. The persistently high unemployment, one legacy of the apartheid era, meant that South Africa did not have the luxury of waiting for new policies to bear fruit. With inflation forecast to exceed the mandated target, the governor would have to tighten monetary policy, which would further restrict investment. He questions whether it is time for South Africa to change course.

Since 1990, 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.

This technical note describes parity conditions (PPP, UIP, and CIP) and develops a model of exchange rate determination.

Technically, the Three-Paned Model helps us understand the determinants of interest rates in general but tells us nothing about any particular interest rate. The vagueness of the Three-Paned Model is useful when first learning international macroeconomics, but is untenable as we move toward a more complete understanding of interest rates. This technical note is much more precise about real and nominal interest rates, providing a more complete IS/LM model as a driver of general movements in interest rates, presenting a supply and demand model for bonds that further enhances our understanding of interest rate movements, and discussing the yield curve, which informs us about the relationship between similar bonds of different maturities.

This technical note discusses risk and term premiums, prominent theories of the yield curve, and how to construct a yield curve.