Mundell-Fleming Model

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Central Equations of the Mundell-Fleming ModelEdit

IS curve: Y=C(Y-T)+I(r)+G+NX(\epsilon,Y,Y^*)

LM curve: {M \over P}=L(r+\pi^e,Y)

BP curve: RG=CF(r-r^*)+NX(\epsilon,Y,Y^*)


Y\equiv \; output

C\equiv \; consumption

T\equiv \; taxes

I\equiv \; investment

r\equiv \; domestic real interest rate

G\equiv \; government spending

NX\equiv \; net exports

\epsilon\equiv \; real exchange rate (foreign currency in terms of domestic currency)

Y^*\equiv \; foreign output

M\equiv \; money supply

P\equiv \; price level

L\equiv \; money demand

\pi^e\equiv \; expected inflation

RG\equiv \; reserve gain (should be zero in equilibrium)

CF\equiv \; capital flows

r^*\equiv \; foreign real interest rate

When totally differentiating the model equations, the following relationships are assumed to hold: {dC \over d(Y-T)}\equiv \;C_{Y-T}>0

{dI \over dr}\equiv \;I_r<0

{dNX \over d\epsilon}\equiv \;NX_\epsilon>0

{dNX \over dY}\equiv \;NX_Y<0

{dNX \over dY^*}\equiv \;NX_{Y^*}>0

{dL \over d(r+\pi^e)}\equiv \;L_{r+\pi^e}<0

{dL \over dY}\equiv \;L_Y>0

{dCF \over d(r-r*)}\equiv \;CF_{r-r^*}>0




Lectures by Paul Pieper (University of Illinois at Chicago), fall 2004.

David Romer, Advanced Macroeconomics

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