lecture 6 the M-F model 国际金融教材.pptVIP

Chinese Finance Research Institute VII. A SOE with perfect capital mobility VII.1 Fixed Exchange Rate Regime Monetary policy (Figure 1-3-8-1) Fiscal policy (Figure 1-3-8-2) Policy effectiveness As far as output growth is concerned, monetary policy is totally ineffective under a fixed rate regime, while an expansionary fiscal policy can lead to a larger increase of output than that under a floating rate economy. The M-F Model: A Graphical Illustration Figure 1-3-8-1 Monetary policy in a fixed regime i Y ie Ye IS LM? BP LM E B Figure 1-3-8-2 Fiscal policy in a fixed regime i Y ie Ye IS BP LM E B IS? LM? E? Ye? VII.2 Floating Exchange Rate Regime Monetary policy (Figure 1-3-9-1) Fiscal policy (Figure 1-3-9-2) Policy effectiveness Fiscal policy is totally ineffective under a floating rate regime, while monetary policy can lead to changes in output. A monetary expansion leads to a depreciation of home currency while an expansionary fiscal policy leads to the appreciation of home currency The M-F Model: A Graphical Illustration Figure 1-3-9-1 Monetary policy in a floating regime i Y ie Ye IS BP LM E LM? IS? E? Ye? * * Contents The M-F Model: A Graphical Illustration The M-F Model: A Formal Illustration An Overall Appraisal The Eternal Triangle Assignments The M-F Model: A Graphical Illustration I. Introduction The model, a workhorse in international finance and open economy macroeconomics, was originally pioneered by Robert A. Mundell (1963; 1964) and Marcus Fleming (1962). If price stickiness is introduced, the model is extended to the so-called M-F-D model, where “D” refers to the Dornbusch’s great contribution in 1976 which we have already covered in the previous lecture. We will summarize the overall assumptions before presenting a brief analysis on the components of the model. II. Assumptions A small open economy model (SOE) Price rigidity (the aggregate supply schedule is therefore horizontal, and there is no difference between a country’s real exc