FANDOM


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^*) $

where:

$ 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 $

GraphsEdit

MF-ISLM

SourcesEdit

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

David Romer, Advanced Macroeconomics