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Mundell-Fleming (2)
 

Mundell-Fleming (2)

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    Mundell-Fleming (2) Mundell-Fleming (2) Presentation Transcript

    • The Mundell-Fleming Model Mainstream Thinking on Open Macroeconomics
    • Thomas Dürmeier Exchange Rates Regulating Global Finance E nominal exchange rate between the euro and the dollar (eg. 1,17 euro/$ = 0,85 $/euro) ε real exchange rate (epsilon) measured in purchasing power our pespective: from USA to EU E = number of units of domestic currency you can get for one unit of foreign currgency example: E USD/EUR = 1,19 $/Euro domestic foreign
    • Thomas Dürmeier Exchange Rate 2 Regulating Global Finance example: E USD/EUR = 1,19 $/Euro depreciation E  ε  (value of currency decreases) appreciation E  ε  (value of currency increases) Real exchange rate: exchange between commodities one Volkswagen P* vs. one Cadillac P 1. Volkswagen with US-price: P* x E 2. In comparison to Cadillac: (P* x E)/P = ε
    • Thomas Dürmeier Investement/Savings - Liquidity/Money: IS-LM Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y L(i) LM IS T  , G  M  i Y social product nominal interest rate - only commodity and captial market - price level is constant - Keynesian bias - short-run
    • Thomas Dürmeier Aggregated Supply and Demand: AS-AD Regulating Global Finance AD: Y t = Y(M/P t , G, T) AS: P t = P t-1 (1+μ) F(1-(Y t /L), z) AS μ  , L  , z  M  , T  , G  P Y social product price level AD In the long-run: only AS determines Y - IS-LM plus labor market - neutrality of money - monetaristic bias - long-run
    • Thomas Dürmeier AS-AD: Neutrality of Money Regulating Global Finance AD: Y t = Y(M/P t , G, T) AS: P t = P t-1 (1+μ) F(1-(Y t /L), z) AS M  , T  , G  P Y social product price level AD In the long-run: only AS determines Y Monetary policy has NO influence on output, only inflation. Only under certain circumstances.
    • Balance of Payment
      • Current account
        • Exports - Imports = Trade balance
        • Investment
      • Capital account
        • Increase in foreign holdings of US assets
        • Increase in US holding of foreign assets
        • Statistical discrepancy
      Commodity flows Capital flows
    • Thomas Dürmeier Exchange Rate Regimes Regulating Global Finance
      • Free floating: no central bank intervention
      • Managed floating: no fixed exchange rate goal, but central bank interventionb
      • Target zones: exchange rate around a band with
      • Crawling pegs: no fixed rate, but alinment rate and process
      • A djustable peg: exchangre rate fixed, no alienment
      • Currency board: autonom body, which controls exchange rate target
      • Fixed or peeged exchange rate: constant exchange rate
      • Dollarisierung (dollarization), Euroisierung (euroization) or currency union
      • World currency
      • (Privatization of money)
      • Source: Frankel, Jeffrey A., Sergio Schmukler und Luis Serven (2002), ”Verifiability and the Vanishing Intermediate Exchange Rate Regime”, in: Susan M. Collins und Dani Rodrik (Hrsg.): Brookings Trade Forum , The Brookings Institution. http://muse.jhu.edu/demolbtf
    • Thomas Dürmeier Elements of Open Macroeconomics Regulating Global Finance
      • Interest rate parity (Mundell-Fleming)
      • Purchasing power parity (monetaristic open macro)
      • Expectations
      • Policy credibility
    • Thomas Dürmeier Mundell-Fleming Modell Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y L(i) LM IS i Y social product nominal interest rate E=E e /(1+i-i*) interest rate parity i E Exchange rate E
    • Thomas Dürmeier Mundell-Fleming Modell: flexible exchange rate and fiscal policy Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y L(i) LM IS G  i Y social product nominal interest rate E=E e /(1+i-i*) interest rate parity i E Exchange rate E appreciation
    • Thomas Dürmeier Fixed exchange rate and fiscal policy Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y L(i) LM IS G  i Y social product nominal interest rate E=E e /(1+i-i*) interest rate parity i E Exchange rate E IS‘ LM‘‘ Pressure on exchange rate