The Mundell Fleminging Model
CHAPTER TWO
2.1 INTRODUCTION
The crude oil price and exchange rates are key research subjects, and both variables generate considerable impacts on macroeconomic conditions such as economic growth, international trade, inflation, and energy management. The relationships between the two have been studied, mainly for guidelines of interaction and causality. In past decades, changes in the price of crude oil have been shown to be a key factor in explaining movements of foreign exchange rates, particularly those measured against the U.S. dollar (Huang and Tseng 2010). While a considerable amount of study have dealt with some aspect of the relationship between international oil price and exchange rate, a number of questions still springs to mind namely: Is there a role of …show more content…
The Mundell–Fleming model is a close relative of the IS–LM model. Both models stress the interaction between the goods market and the money market. Both models assume that the price level is fixed and then show what causes short-run fluctuations in aggregate income (or, equivalently, shifts in the aggregate demand curve). The key difference is that the IS–LM model assumes a closed economy, whereas the Mundell–Fleming model assumes an open economy.
ASSUMPTION
The Mundell–Fleming model makes one important and extreme assumption: it assumes that the economy being studied is a small open economy with perfect capital mobility. That is, the economy can borrow or lend as much as it wants in world financial markets and, as a result, the economy’s interest rate is determined by the world interest rate. In other words, interest rate is constant or fixed r = r*
Mundell-Fleming model was develop mainly to understand how alternative exchange rate regimes (floating and fixed) works and how the choice of exchange rate regime impinge on monetary and fiscal policy of a country
THE MODEL
THE GOODS MARKET AND THE
2.1 INTRODUCTION
The crude oil price and exchange rates are key research subjects, and both variables generate considerable impacts on macroeconomic conditions such as economic growth, international trade, inflation, and energy management. The relationships between the two have been studied, mainly for guidelines of interaction and causality. In past decades, changes in the price of crude oil have been shown to be a key factor in explaining movements of foreign exchange rates, particularly those measured against the U.S. dollar (Huang and Tseng 2010). While a considerable amount of study have dealt with some aspect of the relationship between international oil price and exchange rate, a number of questions still springs to mind namely: Is there a role of …show more content…
The Mundell–Fleming model is a close relative of the IS–LM model. Both models stress the interaction between the goods market and the money market. Both models assume that the price level is fixed and then show what causes short-run fluctuations in aggregate income (or, equivalently, shifts in the aggregate demand curve). The key difference is that the IS–LM model assumes a closed economy, whereas the Mundell–Fleming model assumes an open economy.
ASSUMPTION
The Mundell–Fleming model makes one important and extreme assumption: it assumes that the economy being studied is a small open economy with perfect capital mobility. That is, the economy can borrow or lend as much as it wants in world financial markets and, as a result, the economy’s interest rate is determined by the world interest rate. In other words, interest rate is constant or fixed r = r*
Mundell-Fleming model was develop mainly to understand how alternative exchange rate regimes (floating and fixed) works and how the choice of exchange rate regime impinge on monetary and fiscal policy of a country
THE MODEL
THE GOODS MARKET AND THE