Theory-Based Models

Loading Theory-Based Models

Theory-Based Models

Intermediatetwo curve intersection

Mundell-Fleming Model

An open-economy extension of IS-LM adding the external balance condition to study fiscal policy, monetary policy, and capital mobility.

Read the derivation as a document, with the math typeset directly and the intermediate chains tucked behind expandable steps.

Sections

Setup and notation

Mundell-Fleming adds an external-balance condition to the usual IS-LM system.

i = A - bY

i = m_0 + m_1 Y

i = i_w + b_{BP}(Y - Y^*)

Deriving the BP line

The BP schedule summarizes the combinations of output and interest rates consistent with external balance.

\frac{\partial i}{\partial Y}\Big|_{BP} = b_{BP}

Open-economy equilibrium

The domestic equilibrium is still the IS-LM crossing, but the BP line tells us whether that point is externally balanced.

gap_{BP} = i - \left[i_w + b_{BP}(Y - Y^*)\right]

Fiscal and monetary policy

Open-economy policy effectiveness depends on how the domestic shift changes the position of the IS-LM point relative to BP.

\Delta gap_{BP} = \Delta i - b_{BP}\Delta Y

Theory-Based Models

Theory-Based Models

Intermediatetwo curve intersection

An open-economy extension of IS-LM adding the external balance condition to study fiscal policy, monetary policy, and capital mobility.

Read the derivation as a document, with the math typeset directly and the intermediate chains tucked behind expandable steps.

Sections

Setup and notation

Mundell-Fleming adds an external-balance condition to the usual IS-LM system.

i = A - bY

i = m_0 + m_1 Y

i = i_w + b_{BP}(Y - Y^*)

Deriving the BP line

The BP schedule summarizes the combinations of output and interest rates consistent with external balance.

\frac{\partial i}{\partial Y}\Big|_{BP} = b_{BP}

Open-economy equilibrium

The domestic equilibrium is still the IS-LM crossing, but the BP line tells us whether that point is externally balanced.

gap_{BP} = i - \left[i_w + b_{BP}(Y - Y^*)\right]

Fiscal and monetary policy

Open-economy policy effectiveness depends on how the domestic shift changes the position of the IS-LM point relative to BP.

\Delta gap_{BP} = \Delta i - b_{BP}\Delta Y