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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. 1,1...
Thomas Dürmeier Exchange Rate 2 Regulating Global Finance example: E USD/EUR  = 1,19 $/Euro depreciation E   ε   (value ...
Thomas Dürmeier Investement/Savings - Liquidity/Money: IS-LM Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/...
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 ...
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(...
Balance of Payment <ul><li>Current account </li></ul><ul><ul><li>Exports - Imports = Trade balance </li></ul></ul><ul><ul>...
Thomas Dürmeier Exchange Rate Regimes Regulating Global Finance <ul><li>Free floating: no central bank intervention </li><...
Thomas Dürmeier Elements of Open Macroeconomics Regulating Global Finance <ul><li>Interest rate parity (Mundell-Fleming) <...
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 ...
Thomas Dürmeier Mundell-Fleming Modell:  flexible exchange rate and fiscal policy Regulating Global Finance IS: Y = C(Y-T)...
Thomas Dürmeier Fixed  exchange rate and fiscal policy Regulating Global Finance IS: Y = C(Y-T) + I (Y,i) + G LM: M/P = Y ...
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Mundell-Fleming (2)

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Transcript of "Mundell-Fleming (2)"

  1. 1. The Mundell-Fleming Model Mainstream Thinking on Open Macroeconomics
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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.
  7. 7. Balance of Payment <ul><li>Current account </li></ul><ul><ul><li>Exports - Imports = Trade balance </li></ul></ul><ul><ul><li>Investment </li></ul></ul><ul><li>Capital account </li></ul><ul><ul><li>Increase in foreign holdings of US assets </li></ul></ul><ul><ul><li>Increase in US holding of foreign assets </li></ul></ul><ul><ul><li>Statistical discrepancy </li></ul></ul>Commodity flows Capital flows
  8. 8. Thomas Dürmeier Exchange Rate Regimes Regulating Global Finance <ul><li>Free floating: no central bank intervention </li></ul><ul><li>Managed floating: no fixed exchange rate goal, but central bank interventionb </li></ul><ul><li>Target zones: exchange rate around a band with </li></ul><ul><li>Crawling pegs: no fixed rate, but alinment rate and process </li></ul><ul><li>A djustable peg: exchangre rate fixed, no alienment </li></ul><ul><li>Currency board: autonom body, which controls exchange rate target </li></ul><ul><li>Fixed or peeged exchange rate: constant exchange rate </li></ul><ul><li>Dollarisierung (dollarization), Euroisierung (euroization) or currency union </li></ul><ul><li>World currency </li></ul><ul><li>(Privatization of money) </li></ul><ul><li>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 </li></ul>
  9. 9. Thomas Dürmeier Elements of Open Macroeconomics Regulating Global Finance <ul><li>Interest rate parity (Mundell-Fleming) </li></ul><ul><li>Purchasing power parity (monetaristic open macro) </li></ul><ul><li>Expectations </li></ul><ul><li>Policy credibility </li></ul>
  10. 10. 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
  11. 11. 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
  12. 12. 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
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