曼昆12.ppt

Learning objectives The Mundell-Fleming model:  IS-LM for the small open economy Causes and effects of interest rate differentials Arguments for fixed vs. floating exchange rates The aggregate demand curve for the small open economy The Mundell-Fleming Model Key assumption: Small open economy with perfect capital mobility. r = r* Goods market equilibrium---the IS* curve: The IS* curve: Goods Market Eq’m The IS* curve is drawn for a given value of r*. Intuition for the slope: The LM* curve: Money Market Eq’m The LM* curve is drawn for a given value of r* is vertical because:given r*, there is only one value of Y that equates money demand with supply, regardless of e. Equilibrium in the Mundell-Fleming model Floating fixed exchange rates In a system of floating exchange rates, e is allowed to fluctuate in response to changing economic conditions. In contrast, under fixed exchange rates, the central bank trades domestic for foreign currency at a predetermined price. We now consider fiscal, monetary, and trade policy: first in a floating exchange rate system, then in a fixed exchange rate system. Fiscal policy under floating exchange rates At any given value of e, a fiscal expansion increases Y, shifting IS* to the right. Lessons about fiscal policy In a small open economy with perfect capital mobility, fiscal policy is utterly incapable of affecting real GDP. “Crowding out” closed economy: Fiscal policy crowds out investment by causing the interest rate to rise. small open economy: Fiscal policy crowds out net exports by causing the exchange rate to appreciate. Mon. policy under floating exchange rates An increase in M shifts LM* right because Y must rise to restore eq’m in the money market. Lessons about monetary policy Monetary policy affects output by affecting one (or more) of the components of aggregate demand: closed economy: ?M ? ?r ? ?I ? ?Y small open economy: ?M ? ?e ? ?NX ? ?Y Expansionary mon. policy