(国际收支学说)The Mundell-Fleming Model (Topic 1).pdf

THE MUNDELL-FLEMING MODEL OPEN ECONOMY IS-LM FRAMEWORK Central Assumptions 1. The domestic economy is “small” in relation to the rest of the world: values of world variables (world income, prices and interest rate) exogenous. 2. The domestic economy produces a single composite good, traded on world markets, but an imperfect substitute for world output. 3. Domestic output is demand-determined, with its price, P, constant. The foreign currency price of world output, P*, is also assumed constant. Representation of the exchange rate e = nominal exchange rate, measured as number of units of domestic currency per unit of foreign currency. e.g. ￡0.645 = 1 Euro Rise in e represents a depreciation of the domestic currency Goods Market Equilibrium and the IS Schedule Closed economy GME condition Y = Real Output Y E= E = Real Expenditure Open economy GME condition D = Demand for Domestic Output Y D= E T D C I G X Z= + + + ? T = Real Trade Balance Real Private Sector Consumption 0 1C c c Y= + Real Private Sector Investment 0 1I i i r= ? Real Government Expenditure G G= X = Real value of exports Z = Real value of imports (measured in terms of domestic output equivalent: see Open Economy Handout, pages 3-4) 1 Exports * , W ePX X Y P ? ?= ? ? ? ? *eP P Real Exchange Rate, or Domestic Competitiveness Real World Income WY The value of world income is assumed constant. With P and P* also constant, these arguments can be suppressed in the function (note one-off changes in the values of these variables can be considered by reintroducing them into the function). ( ),X X e= 0dX de > Imports * ,ePZ Z Y P ? ?= ? ? ? ? Again with P and P* constant, this can be simplified ( , )Z Z e Y= We use a specific form of the function 0 1( )Z z e z Y= + 0 0;dz de < = marginal propensity to import 1z 10 1z< < Goods Market Equilibrium or Y C or Y D= I