Transcript
The Mundell-Fleming Model
Mainstream Thinking on Open Macroeconomics
Thomas Dürmeier
Exchange Rates
Regulating Global Finance
E nominal exchange ratebetween the euro and the dollar (eg. 1,17 euro/$ = 0,85 $/euro)
ε real exchange rate (epsilon)measured in purchasing power
our pespective: from USA to EU
E = number of units of domestic currency you can get for one unit of foreign currgency
example: EUSD/EUR = 1,19 $/Euro
domesticforeign
Thomas Dürmeier
Exchange Rate 2
Regulating Global Finance
example: EUSD/EUR = 1,19 $/Euro
depreciation E ε (value of currency decreases)appreciation E ε (value of currency increases)
Real exchange rate: exchange between commoditiesone Volkswagen P* vs. one Cadillac P1. Volkswagen with US-price: P* x E2. In comparison to Cadillac: (P* x E)/P = ε
Thomas Dürmeier
Investement/Savings - Liquidity/Money: IS-LM
Regulating Global Finance
IS: Y = C(Y-T) + I (Y,i) + GLM: M/P = Y L(i)
LMIS
T, G
M
i
Y social product
nom
inal
inte
rest
rat
e
- only commodity and captial market- price level is constant- Keynesian bias- short-run
Thomas Dürmeier
Aggregated Supply and Demand: AS-AD
Regulating Global Finance
AD: Yt = Y(M/Pt, G, T)AS: Pt = Pt-1 (1+μ) F(1-(Yt/L), z)
AS
μ , L, z
M , T, GP
Y social product
pric
e le
vel
AD
In the long-run:only AS determines Y
- IS-LM plus labor market- neutrality of money- monetaristic bias- long-run
Thomas Dürmeier
AS-AD: Neutrality of Money
Regulating Global Finance
AD: Yt = Y(M/Pt, G, T)AS: Pt = Pt-1 (1+μ) F(1-(Yt/L), z)
ASM , T, GP
Y social product
pric
e le
vel
AD
In the long-run:only AS determines Y
Monetary policy has NO influence on output, only inflation.Only under certain circumstances.
Balance of Payment
• Current account– Exports - Imports = Trade balance– Investment
• Capital account– Increase in foreign holdings of US assets– Increase in US holding of foreign assets– Statistical discrepancy
Commodity flows
Capital flows
Thomas Dürmeier
Exchange Rate Regimes
Regulating Global Finance
• Free floating: no central bank intervention• Managed floating: no fixed exchange rate goal, but central bank interventionb• Target zones: exchange rate around a band with• Crawling pegs: no fixed rate, but alinment rate and process• Adjustable peg: exchangre rate fixed, no alienment• Currency board: autonom body, which controls exchange rate target• Fixed or peeged exchange rate: constant exchange rate• Dollarisierung (dollarization), Euroisierung (euroization) or currency union• World currency
• (Privatization of money)
Source: Frankel, Jeffrey A., Sergio Schmukler und Luis Serven (2002), ”Verifiability and the Vanishing Intermediate Exchange Rate Regime”, in: Susan M. Collins und Dani Rodrik (Hrsg.): Brookings Trade Forum, The Brookings Institution. http://muse.jhu.edu/demolbtf
Thomas Dürmeier
Elements of Open Macroeconomics
Regulating Global Finance
• Interest rate parity (Mundell-Fleming)
• Purchasing power parity (monetaristic open macro)
• Expectations
• Policy credibility
Thomas Dürmeier
Mundell-Fleming Modell
Regulating Global Finance
IS: Y = C(Y-T) + I (Y,i) + GLM: M/P = Y L(i)
LMISi
Y social product
nom
inal
inte
rest
rat
e
E=Ee/(1+i-i*)interest rate parityi
E Exchange rateE
Thomas Dürmeier
Mundell-Fleming Modell: flexible exchange rate and fiscal policy
Regulating Global Finance
IS: Y = C(Y-T) + I (Y,i) + GLM: M/P = Y L(i)
LMIS
Gi
Y social product
nom
inal
inte
rest
rat
e
E=Ee/(1+i-i*)interest rate parityi
E Exchange rateE
appreciation
Thomas Dürmeier
Fixed exchange rate and fiscal policy
Regulating Global Finance
IS: Y = C(Y-T) + I (Y,i) + GLM: M/P = Y L(i)
LMIS
Gi
Y social product
nom
inal
inte
rest
rat
e
E=Ee/(1+i-i*)interest rate parityi
E Exchange rateE
IS‘
LM‘‘Pressure on exchange rate
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