A Logical Inference and Extension of the Mundell-Fleming Model

Abstract

Even though the New Open Economy Macroeconomics models dominate current research trend, the Mundell-Fleming model still shines for its theoretical importance and empirical relevance, and retains its status as one of the workhorse models of international economics. A full grasp of this model is challenging as it covers a wide range of scenarios featuring different exchange rate regimes and various degrees of capital mobility. This paper proposes a logical inference method for studying this model, based on a minor modification of one of its key equations. This method allows one to logically infer the impact effect on the IS, LM and BP curves caused by monetary or fiscal policy moves in each of the contexts, and the subsequent dynamics of the three curves. A simple extension of the monetary equilibrium condition along the same line of thoughts makes the model applicable to analyzing the effects of innovative ways of sterilized foreign exchange intervention.