Lec 3 Mundell – Fleming.pptx - Mundell Fleming model and...

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Lecture 3 Mentor: Pham Xuan Truong ([email protected]) Mundell – Fleming model and AD in open economy
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Content I Introduction of Mundell – Fleming model II Mundell – Fleming model under flexible foreign exchange rates III Mudell – Fleming model under fixed foreign exchange rates IV AD in open economy Appendix 1Mudell – Fleming model applied to large, open country with perfect capital mobility Appendix 2 Mundell – Fleming model applied to small, open country with imperfect capital mobility
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I Introduction of Mundell – Fleming model The Mundell - Fleming model was developed in the early 1960s. Mundell’s contribution are collected in Robert A. Mundell, International economics (NY, Macmillan,1968) Standard open macro economy model explains how do GDP, BoP, exchange rate, interest...interact? Based on IS-LM model but with assumption of international trade and international capital flows ( open small economy )
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I Introduction of Mundell – Fleming model There is assumingly perfect capital mobility in the model, meaning that it can borrow or lend as much as it wants in world financial markets, and therefore, the economy’s interest rate is controlled by the world interest rate, mathematically denoted as r = r*. One key lesson about this model is that the behavior of an economy depends on the exchange rate regime it adopts—floating or fixed.
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I Introduction of Mundell – Fleming model Model under Y – r coordinates Open economy + Perfect capital mobility Open economy + Imperfect capital mobility
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Model under Y – r coordinates (r, Y endogenous variables; other exogenous variables) I Introduction of Mundell – Fleming model Small open economy + perfect capital mobility (r* is the world interest rate) Equilibrium point is the intersection among IS, LM and BP which indicate internal balance in goods and money market and external balance in foreign exchange market
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Model under Y – e coordinates (e, Y endogenous variables; others exogenous varibles) The goods market and IS* curve I Introduction of Mundell – Fleming model e is the foreign exchange rate indicating how many foreign currency units could be exchanged to one domestic currency unit
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Model under Y – e coordinates The goods market and LM* curve I Introduction of Mundell – Fleming model
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Model under Y – e coordinates I Introduction of Mundell – Fleming model Equilibrium point is the intersection between IS* and LM* which indicate internal balance in goods and money market and external balance in foreign exchange market
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