Mundell Model
Mundell -Fleming Model
The Mundell–Fleming model, also known as the IS-LM-BP model, is an economic model first set forth (independently) by Robert Mundell and Marcus Fleming The model is an extension of the IS-LM model. Whereas the traditional IS-LM Model deals with a closed economy, the Mundell–Fleming model describes an open economy.
The Mundell-Fleming model portrays the short-run relationship between an economy's nominal exchange rate, interest rate, and output (in contrast to the closed-economy IS-LM model, which focuses only on the relationship between the interest rate and output). The Mundell–Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. This principle is frequently called "the Unholy Trinity”.
Mundell-Fleming Model
(In short)
Robert Mundell and Marcus Fleming set up the Mundell-Fleming Model. This model is different from the IS-LM model in the sense that the former deals with a small open economy while the latter deals with autarky.
The Mundell- Fleming Model can be explained with the help of the following equations:
The IS component is expressed as
• Y = C + I + G + NX Where Y: GDP
• C = C(Y - T, i - E(p))
Where C: Consumption
T: Taxes
I: Interest Rate
E(p): Expected inflation rate
• I = I(i - E(p), Y - 1) Where Y - 1 : previous period GDP
I is investment
• G = G where G: Government spending exogeneously given
• NX = NX(e,Y,Y * ) Where NX : Net exports e : Real exchange rate
Y * : GDP of the foreign country
LM component
• M/P=L(i,Y)
Where M: money supply
P: average price
L: liquidity
BOP Component
• CA = NX Where CA: Current Account
• KA = z(i - i * ) + k
Where z: capital mobility i *: foreign interest rate k: capital investment exogeneously fixed
The Mundell-Flemming Model assumes that the domestic and the international interest rates are the same. The
The Mundell–Fleming model, also known as the IS-LM-BP model, is an economic model first set forth (independently) by Robert Mundell and Marcus Fleming The model is an extension of the IS-LM model. Whereas the traditional IS-LM Model deals with a closed economy, the Mundell–Fleming model describes an open economy.
The Mundell-Fleming model portrays the short-run relationship between an economy's nominal exchange rate, interest rate, and output (in contrast to the closed-economy IS-LM model, which focuses only on the relationship between the interest rate and output). The Mundell–Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. This principle is frequently called "the Unholy Trinity”.
Mundell-Fleming Model
(In short)
Robert Mundell and Marcus Fleming set up the Mundell-Fleming Model. This model is different from the IS-LM model in the sense that the former deals with a small open economy while the latter deals with autarky.
The Mundell- Fleming Model can be explained with the help of the following equations:
The IS component is expressed as
• Y = C + I + G + NX Where Y: GDP
• C = C(Y - T, i - E(p))
Where C: Consumption
T: Taxes
I: Interest Rate
E(p): Expected inflation rate
• I = I(i - E(p), Y - 1) Where Y - 1 : previous period GDP
I is investment
• G = G where G: Government spending exogeneously given
• NX = NX(e,Y,Y * ) Where NX : Net exports e : Real exchange rate
Y * : GDP of the foreign country
LM component
• M/P=L(i,Y)
Where M: money supply
P: average price
L: liquidity
BOP Component
• CA = NX Where CA: Current Account
• KA = z(i - i * ) + k
Where z: capital mobility i *: foreign interest rate k: capital investment exogeneously fixed
The Mundell-Flemming Model assumes that the domestic and the international interest rates are the same. The