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1、MMACROECONOMICSACROECONOMICSC H A P T E RSIXTH EDITIONSIXTH EDITIONThe Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime12In this chapter, you will learnthe Mundell-Fleming model (IS-LM for the small open economy) causes and effects of interest rate differentials argumen
2、ts for fixed vs. floating exchange rates how to derive the aggregate demand curve for a small open economy12.1 The Mundell-Fleming modelKey assumption: Small open economy with perfect capital mobility. r = r*Goods market equilibrium the IS* curve:where e = nominal exchange rate = foreign currency pe
3、r unit domestic currencyThe IS* curve: Goods market eqmThe IS* curve is drawn for a given value of r*. Intuition for the slope:Y eIS*From Keynesian Cross to IS CurveThe LM* curve: Money market eqmThe LM* curve is drawn for a given value of r*. is vertical because: given r*, there is only one value o
4、f Y that equates money demand with supply, regardless of e. Y eLM*The LM CurveEquilibrium in the Mundell-Fleming modelY eLM*IS*equilibrium exchange rateequilibrium level of incomeFloating Others in the U.S. wanted tariffs on Chinese goods.CASE STUDY: The Chinese Currency ControversyIf China lets the
5、 yuan float, it may indeed appreciate. However, if China also allows greater capital mobility, then Chinese citizens may start moving their savings abroad. Such capital outflows could cause the yuan to depreciate rather than appreciate. Mundell-Fleming and the AD curve So far in M-F model, P has bee
6、n fixed. Next: to derive the AD curve, consider the impact of a change in P in the M-F model.We now write the M-F equations as:(Earlier in this chapter, P was fixed, so we could write NX as a function of e instead of .)Y1Y2Deriving the AD curveY Y PIS*LM*(P1)LM*(P2)ADP1P2Y2Y121Why AD curve has negat
7、ive slope:P LM shifts left NX Y (M/P)From the short run to the long runLM*(P1)12then there is downward pressure on prices. Over time, P will move down, causing (M/P ) NX Y P1SRAS1Y Y PIS*ADLRASLM*(P2)P2SRAS2Large: Between small and closedMany countries including the U.S. are neither closed nor small
8、 open economies. A large open economy is between the polar cases of closed & small open. Consider a monetary expansion: Like in a closed economy, M 0 r I (though not as much) Like in a small open economy, M 0 NX (though not as much)Chapter SummaryChapter Summary1. Mundell-Fleming model the IS-LM mod
9、el for a small open economy. takes P as given. can show how policies and shocks affect income and the exchange rate.2.Fiscal policy affects income under fixed exchange rates, but not under floating exchange rates. CHAPTER 12 The Open Economy Revisitedslide 50Chapter SummaryChapter Summary3.Monetary
10、policy affects income under floating exchange rates. under fixed exchange rates, monetary policy is not available to affect output.4.Interest rate differentials exist if investors require a risk premium to hold a countrys assets.An increase in this risk premium raises domestic interest rates and cau
11、ses the countrys exchange rate to depreciate.CHAPTER 12 The Open Economy Revisitedslide 51Chapter SummaryChapter Summary5.Fixed vs. floating exchange rates Under floating rates, monetary policy is available for can purposes other than maintaining exchange rate stability. Fixed exchange rates reduce some of the uncertainty in international transactions. CHAPTER 12 The Open Economy Revisitedslide 52
