Abstract
<p><em>Applying an extended Mundell-Fleming Model to Australia, this paper finds that expansionary fiscal policy does not affect output whereas expansionary monetary policy raises output. In addition, a higher real stock price, a lower real oil price or a lower expected inflation rate would increase output. Hence, the predictions of the Mundell-Fleming model works for Australia’s economy. </em></p>
Highlights
The Mundell-Fleming model has been studied extensively
These analyses suggest that expansionary monetary policy is expected to increase equilibrium real GDP, that expansionary fiscal policy is expected not to affect equilibrium real GDP, and that the impact of a higher real stock price is unclear
Real GDP has a positive relation with real M2 money and the real stock price and a negative relation with the real interest rate, the real oil price and the expected inflation rate
Summary
The Mundell-Fleming model has been studied extensively. Under a floating exchange rate system, it predicts that expansionary fiscal policy does not raise output but causes real appreciation and that expansionary monetary policy raises output and causes real depreciation. Huh (1999) applied the Mundell-Fleming model to study Australia’s economy using five variables – IS, money demand, money supply, the world interest rate, and aggregate supply. Jeong, Kang, and Kim (2017) investigated the effect of fiscal expansion on output, the exchange rate and the trade balance based on an extended Mundell-Fleming model. Higher fiscal multipliers are affected by monetary policy, the exchange rate policy and institutional factors.
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