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Mundell-Fleming Presentation

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Paul Kohlhaussen

A somewhat basic overview of the workings behind the Mundell-Fleming model under both flexible and fixed exchange rates.

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Mundell-Fleming Model Paul Kohlhaussen
Agenda History IS-LM Balance of Payments The Impossible Trinity Applications Further points of investigation
Assumptions History Mundells & Flemings Expansion 1960s Robert Mundell Marcus Fleming } Independently expanded on the Keynesian model of macroeconomic policy Small open economy, short run Impact of macroeconomic policy under Floating exchange rates Fixed exchange rates
IS-LM Investment Savings Curve Liquidity Preference Money Supply Curve IV: Interest Rate DV: Level of Y IV: Level of Y DV: Interest Rate Y = C + I + G + NX M/P = L(i,Y) i I = Y MD = i Y
Balance of Payments Current + Capital Accounts: A countrys transactions with the rest of the world BoP = CA + KA Current Account Capital Account Imports & exports Investment income Foreign aid - transfers 賊 Foreign holdings of countrys assets 賊 Countrys holdings of foreign assets
Mundell-Fleming Presentation
Under a Flexible Exchange Rate Global interest rates increase: i Y IS LM BoP BoP1 IS1 Capital 鍖ows out Depreciates currency Boosts exports IS curve shifts to the right (Marshall-Lerner condition)} iW iW1 Y1Y
Under a Fixed Exchange Rate Expansionary Monetary Policy: i Y IS LM BoP Gov. buys bonds: money supply i decreases, Y increases = capital out鍖ow Y = Imports increase: NX<0: currency depreciates iW iW1 BoP1 LM1 Y1Y
Under a Fixed Exchange Rate Expansionary Fiscal Policy: Government expenditure , IS shifts right i increases, Y increases = capital in鍖ow Current account , BoP shifts up Sell currency, money supply = new Y i Y IS LM BoP BoP1 IS1 iW iW1 Y1Y LM1
The Impossible Trinity Free capital mobility Fixed exchange rates Independent monetary policy
Applications Croatia: only monetary or only 鍖scal policy will have no effect on economy because of capital 鍖ows (LC!) German reuni鍖cation: i increased with strong growth, caused France and Belgium to lose demand & output due to EMS ties Poland? (Too big?) Other suggestions? Aim: to investigate the effectiveness of different policies under the Mundell-Fleming model Transition of socialist planning to open capitalism}

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Mundell-Fleming Presentation

  • 2. Agenda History IS-LM Balance of Payments The Impossible Trinity Applications Further points of investigation
  • 3. Assumptions History Mundells & Flemings Expansion 1960s Robert Mundell Marcus Fleming } Independently expanded on the Keynesian model of macroeconomic policy Small open economy, short run Impact of macroeconomic policy under Floating exchange rates Fixed exchange rates
  • 4. IS-LM Investment Savings Curve Liquidity Preference Money Supply Curve IV: Interest Rate DV: Level of Y IV: Level of Y DV: Interest Rate Y = C + I + G + NX M/P = L(i,Y) i I = Y MD = i Y
  • 5. Balance of Payments Current + Capital Accounts: A countrys transactions with the rest of the world BoP = CA + KA Current Account Capital Account Imports & exports Investment income Foreign aid - transfers 賊 Foreign holdings of countrys assets 賊 Countrys holdings of foreign assets
  • 7. Under a Flexible Exchange Rate Global interest rates increase: i Y IS LM BoP BoP1 IS1 Capital 鍖ows out Depreciates currency Boosts exports IS curve shifts to the right (Marshall-Lerner condition)} iW iW1 Y1Y
  • 8. Under a Fixed Exchange Rate Expansionary Monetary Policy: i Y IS LM BoP Gov. buys bonds: money supply i decreases, Y increases = capital out鍖ow Y = Imports increase: NX<0: currency depreciates iW iW1 BoP1 LM1 Y1Y
  • 9. Under a Fixed Exchange Rate Expansionary Fiscal Policy: Government expenditure , IS shifts right i increases, Y increases = capital in鍖ow Current account , BoP shifts up Sell currency, money supply = new Y i Y IS LM BoP BoP1 IS1 iW iW1 Y1Y LM1
  • 10. The Impossible Trinity Free capital mobility Fixed exchange rates Independent monetary policy
  • 11. Applications Croatia: only monetary or only 鍖scal policy will have no effect on economy because of capital 鍖ows (LC!) German reuni鍖cation: i increased with strong growth, caused France and Belgium to lose demand & output due to EMS ties Poland? (Too big?) Other suggestions? Aim: to investigate the effectiveness of different policies under the Mundell-Fleming model Transition of socialist planning to open capitalism}