mundell-fleming presentation
Post on 20-Jul-2015
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Agenda• History• IS-LM• Balance of Payments• The Impossible Trinity• Applications• Further points of investigation
Assumptions
HistoryMundell’s & Fleming’s 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-LMInvestment 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
= YMD = i
Y
Balance of PaymentsCurrent + Capital Accounts:
A country’s transactions with the rest of the world
BoP = CA + KA
Current Account Capital Account
• Imports & exports • Investment income • Foreign aid - transfers
• ± Foreign holdings of country’s assets
• ± Country’s holdings of foreign assets
Under a Flexible Exchange Rate
Global interest rates increase:
i
YIS
LM
BoPBoP1
IS1
• Capital flows 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
YIS
LM
BoP
• Gov. buys bonds: money supply • i decreases, Y increases = capital outflow • 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 inflow • Current account , BoP shifts up • Sell currency, money supply = new Y
i
YIS
LM
BoP
BoP1
IS1
iW
iW1
Y1Y
LM1
Applications
• Croatia: only monetary or only fiscal policy will have no effect on economy because of capital flows (LC!)
• German reunification: 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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