Fleming Model Research Articles

Small-Country Mundell–Fleming (IS/LM/BP) Model Predictions Under Both Fixed and Flexible Exchange Rates: Evidence from Australia and S. Korea

The small-country IS/LM/BP (Mundell–Fleming) model predicts that monetary policy is totally ineffective in countries with fixed exchange rates and super-effective in countries with flexible exchange rates. Furthermore, this model predicts that, under fixed exchange rates, fiscal policy is stronger the more mobile capital is in terms of moving in and out of the country, but it predicts the opposite for countries with flexible exchange rates; fiscal policy is stronger the less mobile capital is. This paper tests these predictions by applying reiterative truncated projected least squares (RTPLS) to quarterly data from Australia and the Republic of Korea when they employed fixed and then flexible exchange rates. RTPLS produces a separate total derivative estimate for each observation, where the differences in these estimates are due to omitted variables. By doing so, RTPLS makes it possible to see how the estimated relationship changes over time. I found that the effectiveness of monetary policy was not zero under fixed exchange rates but that its effectiveness did increase when Australia and S. Korea switched to flexible exchange rates. Under flexible exchange rates, I found that the effectiveness of fiscal policy was statistically higher than zero for both countries, which conflicts with the assumption of perfect capital mobility.

The Argentine economy through the lens of an adapted Mundell–Fleming model for small open peripheral economies

The Argentine economy through the lens of an adapted Mundell–Fleming model for small open peripheral economies

A Tale of Two Trilemmas: Comparing the International Monetary and Financial Trilemmas

We critically analyze and compare the analytical structures of the international monetary and financial trilemmas. The first structure says that countries cannot have all three of fixed exchange rates, free capital mobility, and monetary autonomy. The second argues that countries cannot have all three of financial globalization, absence of financial crises, and financial autonomy. While the monetary trilemma is often described as being based on the Mundell–Fleming model, this is true only under the assumption of perfect capital mobility. Imperfect mobility can be caused by factors other than capital controls and in this case the constraints of the monetary trilemma need not be binding in the short run. In order to have a mechanism to provide balance of payments equilibrium, however, the theory of economic policy demonstrates that the monetary trilemma must be binding in the long run. While pointing to an important issue the financial trilemma formulation does not provide the most useful way to analyze the tradeoffs generated by financial globalization. More useful for this purpose is the literature on international externalities and public goods. We also argue that for many countries, giving up monetary autonomy will be more costly than giving up financial policy autonomy.

Can national productions replace imports in West African countries? Estimation of the Marshall–Lerner–Robinson condition (MLRC)

PurposeThis article examines if the national productions of West African Economic and Monetary Union (WAEMU) countries can be substituted for the imports by testing MLRC in these countries.Design/methodology/approachThe Mundell–Fleming model (MMF) is the analytical framework adopted in this paper with import demand and export supply functions estimation borrowed to Thirlwall (1979). This study covers four countries in West Africa from 1990 to 2021. The estimation procedure used is an Autoregressive Distributed Lag (ARDL) approach to cointegration.FindingsThe findings reveal that there is a strong marginal propensity to import in the WAEMU countries. The hypothesis of a non-significant price effect on imports in the short-term is confirmed for several countries while only Togo satisfies the MLRC in the short and long run.Originality/valueThis study presents several originalities: (1) it evaluates MLRC with a clear analytical framework; (2) unlike other studies, this article quantifies the MLRC from a theoretical, econometric and empirical point of view; (3) this article presents the results country by country in order to reveal heterogeneity between countries; (4) this study adds to the Marshall–Lerner condition for the derivation of Robinson by considering a situation where initially the trade balance is not in equilibrium.

Optimal Monetary Policy under Balance-Sheet Effects on the Non-tradable Sector in a Small Open Economy

The choice of an exchange rate regime is crucial in small open economies (SOEs) with a dollarized financial sector. While the traditional Mundell–Fleming model supports a floating exchange rate, evidence shows that central banks frequently intervene in exchange markets. One of the reasons for these interventions is the consequences of large depreciations that could trigger negative balance-sheet effects. This paper extends the literature about the optimal monetary policy in SOEs, by considering a heterogeneous hedge across tradable and non-tradable sectors. Our findings support a ‘leaning against the wind’ policy as an optimal response to negative external shocks. This result is present even if only one sector of the economy faces credit constraints. We show that the vulnerability of the economy to large negative external shocks depends not only on the overall leverage, but also on the distribution of foreign currency debt across economic sectors.

Does the Mundell-Fleming Model Apply to Malaysia's Output?

Based on an extended Mundell-Fleming model, this paper finds that both fiscal expansion and monetary expansion raise output in Malaysia and that a lower real interest rate, a higher stock value, a lower real oil price and a lower expected inflation rate increase output. Hence, a managed floating system with no predetermined path of the exchange rate adopted by Malaysia may lead to better outcomes than the predictions of the Mundell- Fleming model that fiscal expansion does not raise output under a floating exchange rate but increases output under a fixed exchange rate whereas monetary expansion increases output under a floating exchange rate but does not affect output under a fixed exchange rate (Mankiw, 2019).

A method of assessing essential amino acid availability from microbial and ruminally undegraded protein in lactating dairy cows

The objective of this study was to extend a stable isotope-based assessment of AA absorption from rumen-degradable protein (RDP) sources to include determination of essential AA (EAA) availability from microbial protein (MCP). To demonstrate the technique, a study using a 2 × 2 factorial arrangement of treatments applied in a repeated 4 × 4 Latin square design was undertaken. Factors were high and low rumen-degradable protein and high and low starch. Twelve lactating cows were blocked into 3 groups according to days in milk and randomly assigned to the 4 treatment sequences. Each period was 14 d in length with 10 d of adaption followed by 4 d of ruminal infusions of 15N-labeled ammonium sulfate. On the last day of each period, a 13C-labeled AA mixture was infused into the jugular vein over a 6-h period to assess total AA entry. Rumen, blood, urine, and milk samples were collected during the infusions. Ruminal bacteria and blood samples were assessed for AA enrichment. Total plasma AA absorption rates were derived for 6 EAA from plasma 13C AA enrichment. Absorption of 6 EAA from MCP was calculated from total AA absorption based on 15N enrichment in blood and rumen bacteria. Essential AA absorption rates from total protein, MCP, and rumen-undegradable protein were derived with standard errors of the mean of 6, 14, and 14%, respectively. An average of 45% of absorbed EAA were from MCP, which varied among 6 EAA and was interactively affected by starch and RDP in diets. Microbial AA availability measured by isotope dilution method increased with the high RDP diets and was unaffected by starch level, except for Met, which decreased with high starch. Microbial protein outflow, estimated from urinary purine derivatives, increased with RDP and was not significantly affected by starch. This was consistent with measurements from the isotope dilution method. Total AA absorption rates measured from isotope dilution were similar to estimates from CNCPS (v. 6.55), but a lower proportion of absorbed AA was derived from MCP for the former method. Compared with the isotope and CNCPS estimates, the Fleming model underestimated microbial EAA and total EAA availability. An average of 58% of the absorbed EAA was converted into milk, which varied among individual AA and was interactively affected by starch and RDP in diets. The isotope dilution approach is advantageous because it provides estimates of EAA availability for individual EAA from rumen-undegradable protein and MCP directly with fewer errors of measurement than can be achieved with intestinal disappearance methods.

Pengembangan Rumah Baca di Pedesaan Dengan Fleming Model (VAK)

Abstract— The reading garden as a place for learning activities is still quiet of enthusiasts and visitors. In fact, the reading park should be able to become a supporter to increase new literary characters. Taman Baca must support the out-of-school program curriculum. The village reading park must act as a learning tool for the community. The reading garden must be able to be a source of information that provides resources from books and other reading materials. Village reading parks should have reference materials for learning and academic activities. The reading garden must also be a source of entertainment (recreation) that provides recreational reading material to take advantage of leisure time. The activities carried out in the form of socialization and mentoring of learning in Taman Baca Masyarakat (TBM). This program aims to foster reading interest and a love of reading in rural children, thus enriching the learning experience for citizens and adding insight into science and technology. The socialization activities in TBM are about five Basic Principles of Literacy Development and Implementation. While the assistance activities are in the form of applying learning styles with the Fleming Model. Keywords—: TBM; Literacy; Fleming Model.

DOES THE CAUSAL RELATIONSHIP BETWEEN THE TWIN DEFICITS VARY OVER TIME? EVIDENCE FROM A BOOTSTRAP ROLLING WINDOW APPROACH

This paper uses the bootstrap rolling window approach to analyze the dynamic causal relationship between the fiscal deficit and the trade deficit in the US from 1901 to 2018. We find the origination and termination of each causality period by considering the structural breaks. The results show that the fiscal deficit had a positive impact on the trade deficit from 1946 to 1956, from 1982 to 1998, in 2000 and from 2002 to 2008, which is in accord with the results of the Mundell–Fleming model, while it had a negative impact from 1937 to 1945. The trade deficit had a positive impact on the fiscal deficit from 1940 to 1942, from 1959 to 1975 and from 1981 to 1994, mainly due to the World War II, oil crisis and trade friction with Japan. It means that the fiscal policy of American federal government can affect the external imbalance.

The forward‐looking ability of the real exchange rate and its misalignment to forecast the economic performance and the stock market return

AbstractThis paper aims to examine whether exchange rates can predict future changes in the stock market return and in the economic performance of a country. On the basis of a revision that incorporates relative stock price and rational expectation in Dornbusch's dynamic Mundell–Fleming model, I present a model that can be used for analysing the forward‐looking ability of the real exchange rate. The model builds on the works of Campbell and Shiller (Journal of Political Economy, 95, 1987 and 1062), MacDonald and Taylor (IMF Staff Papers, 40, 1993 and 89) and Engel (American Economic Review, 106, 2016 and 436) which can also be converted into a forward‐looking version of real exchange rate misalignment model to investigate whether the deviation of the real exchange rate from its fundamental value would contain an economically significant predictable component on forecasting the future stock price movement and the real output.

The dilemma phenomenon, logistics for monetary independence policy and foreign exchange reserves

The development of financial integration makes a country’s economic links difficult. This is especially so for emerging market countries, which are more vulnerable to economic shocks. The objective of this paper is to explore whether the emerging market countries which adopt floating exchange rate system have realized, at the same time, in the aftermath of a crisis, free movement of capital flow and independence of monetary policy. This is done by introducing foreign exchange reserves into Mundell–Fleming model to do derivation. The approach is supported by empirical research based on 20 emerging countries including China, Brazil, Poland and South Africa and others. It was found that: (1) after the crisis, the emerging market countries that implemented floating exchange rate system did not achieve monetary policy independence. Rapid accumulation of foreign exchange reserves weakened the positive effect of the increase in money supply on output; (2) As a result of holding foreign exchange reserves, the independence of monetary policy in emerging market countries has been challenged, independently of the type of exchange rate system adopted, which proves the existence of dilemma phenomenon. Finally, this study puts forward policy recommendations on the exchange rate system and capital account convertibility for China.

Pengembangan Rumah Baca di Pedesaan Dengan Fleming Model (VAK)

The reading garden as a place for learning activities is still quiet of enthusiasts and visitors. In fact, the reading park should be able to become a supporter to increase new literary characters. Taman Baca must support the out-of-school program curriculum. The village reading park must act as a learning tool for the community. The reading garden must be able to be a source of information that provides resources from books and other reading materials. Village reading parks should have reference materials for learning and academic activities. The reading garden must also be a source of entertainment (recreation) that provides recreational reading material to take advantage of leisure time. The activities carried out in the form of socialization and mentoring of learning in Taman Baca Masyarakat (TBM). This program aims to foster reading interest and a love of reading in rural children, thus enriching the learning experience for citizens and adding insight into science and technology. The socialization activities in TBM are about five Basic Principles of Literacy Development and Implementation. While the assistance activities are in the form of applying learning styles with the Fleming Model.

Chinese Currency Devaluation and the Economic Implications for Nigeria

The decision of Chinese government to devalue the Yuan has attracted serious condemnation by majorly developed economies, despite the government position that the devaluation was aimed at aligning the Yuan with the market rate. The general argument is anchored on the notion that the devaluation was a strategy to increase China's share of global trade by making its goods cheaper in the international market. This thinking is influenced by the long standing Mundell–Fleming model, which aligned with the theory that competitive devaluation is detrimental to the world economy, because of beggar-thy-neighbour welfare effect. The situation is compelling other countries to respond by improving their balance of trade in response to China tactics. The inability of developing economies to respond to this global trade war could be attributed to factors such as colonialism, presence of agency of restraints, complementarity among developing countries, and other institutional rigidities such as technological deficiency, infrastructure deficit, and commodity based exports, among others. Chinese currency devaluation has impacted meaningfully on the Nigeria economy given the fact that Nigeria maintains strong economic ties with China. The paper argues that for developing economies to effectively respond to competitive devaluation, they must close their borders to certain goods, improve infrastructure, prioritize technological transfer, embrace value-added production, and eliminate institution rigidities that hinder the ease of doing business.

Factors Affecting Export Competitiveness of Singapore’s Manufacturing Sector: A Regression Analysis

This paper examines the export competitiveness of the manufacturing sector in Singapore. More specifically, we examine how the existence of import content of exports, productivity gains, and profit margins affect the competitiveness of Singapore’s manufacturing exports. Using proxies such as price of exports, price of imports, unit business costs, and net operating surplus over manufacturing output, we analyze our results empirically and seek to show the significance of these variables in affecting the export competitiveness in the unique case of Singapore. As price of exports and price of imports are both expressed in Singapore dollars (SGD) and this captures the exchange rate, we can assess the impact of a stronger SGD on the export competitiveness of Singapore’s manufacturing sector. Traditional economic notions according to Mundell–Fleming model have predominantly assumed that the appreciation of local currency would stimulate imports and harm exports, vice versa. However, in the case of Singapore where there is a high import content in exports, our paper reveals that exports are not adversely affected by an appreciation of SGD. This is attributed to the direct causal relationship between import prices and export prices that helps to minimize the effects of a higher cost of export production brought about by appreciation, with lower import costs. Furthermore, the impacts of productivity growth and profit margins on export competitiveness are very small, supporting the notion that Singapore exporters are price-takers.

Does Fiscal Deficit Affect Current Account Deficit in India? An Econometric Analysis

The aim of this article is to examine the validity of the Keynesian proposition and Ricardian equivalence (RE) theorem for the developing country India over the period 1990–2015. The Mundell–Fleming model and Feldstein chain model which revolve around the Keynesian proposition argues it is budget deficit (BD) which influences current account deficit (CAD), with the increase in interest rate. While as RE theorem states that there is no relationship between BD and CAD, the decrease in tax rates will not increase the consumption because rational agents consider today’s deficit financing as tomorrow’s liabilities. The article initially investigates the theoretical foundation, followed by empirical literature, and uses various methods of econometrics to testify its validity. A co-integration and vector error correction model (VECM) model validates the existence of long-run relationship. The results of Granger causality test reveal the existence of bi-directional causality between BD and CAD and validates Keynesian proposition in India. Our results conclude that instability in macro variables such as inflation, exchange rate, interest rate and money supply (MS) causes CAD and BD which further have been proved by Cholesky decomposition method. However, it has been said in the global economic world that no one can escape the windfall effect of exchange rate volatility and rising prices, and such effects can be minimised but not eliminated. JEL: E12, E31, E52, E62, E63, E41

Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

The workhorse open economy macromodel suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers, however, believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell–Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically and find support for the key predictions in the data.

‘Twin Deficits’ Hypothesis

Higher and persistent level of fiscal deficit and current account deficit is the problem of the day for Indian economy. There exists an argument that higher fiscal deficit is the major factor behind worsening balance of payments position. However, there is no identical perception on the relationship between fiscal deficit and current account deficit both theoretically and empirically. Hence this article is a revisit to the existing debate to see whether fiscal deficit and current account deficit can be called as ‘twin deficits’ pertaining mainly to Indian economy. Using long-term annual data for the period 1980–1981 to 2012–2013 on Indian economy and using vector error correction method, this article seeks to prove that there exists long-term positive association between fiscal deficit and current account deficit, and hence can be called as ‘twins’. Using structural VAR method it has been proved here that fiscal deficit is in line with the pattern illustrated in Keynesian absorption theory and Mundell–Fleming model in regard to its impact on current account deficit. This article negates the relevance of Ricardian equivalence theory in Indian context.

Not all international monetary shocks are alike for the Japanese economy

This paper examines the influence of monetary aggregates shocks in the U.S., China and the Euro area on Japan. China's monetary expansion has significant effects on Japan's economy that are quite different from those of the U.S. and Euro area. In line with the implications of the Mundell–Fleming model when there are capital controls in place, Chinese monetary expansion is found to primarily affect Japan through trade. The income absorption effect of China's monetary expansion is substantial for Japan. China's monetary expansion results in significant increases in Japan's industrial production, exports and inflation, and decreases in the trade-weighted yen. After 24months, monetary shocks in China forecast 20% of the variation in Japan's real trade balance. In contrast, U.S. monetary expansion results in contraction in Japan's industrial production, exports and trade balance (expenditure-switching). Monetary expansion in the Euro area does not significantly affect Japan. Structural vector error correction models and a factor-augmented model are estimated to establish robustness of results.

Mundell–Fleming without the LM curve: the exogenous interest rate in an open economy

In this paper we evaluate critically the popular Mundell–Fleming model from the heterodox standpoint of the exogenous interest-rate approach. We criticize the assumptions of exogenous money supply, ‘perfect’ international capital markets and inelastic exchange-rate expectations. We show that in a more realistic framework none of the main results of the Mundell–Fleming model on the relative effectiveness of fiscal and monetary policies is valid, either in floating and fixed exchange-rate regimes. We conclude that, within certain very asymmetric bounds, the Central Bank has the power to determine the domestic interest rate exogenously even in open economy with free capital mobility and that there is no automatic market mechanism to ensure the automatic adjustment of the interest rate and exchange rate to sustainable levels.

Endogenous money and public foreign debt during the Argentinean Convertibility

This paper tries to demonstrate that the endogeneity of money in the Argentinean currency board, known as Convertibility, was compatible with the heterodox endogenous money approach. The Argentinean Convertibility was interpreted by the conventional view as a pure case of the Mundell–Fleming model with fixed exchange rate (MFFER). This approach points out that domestic money became ‘endogenous’ because the central bank loses the ability to determine the monetary policy. However, this last endogenity process has nothing to do with the heterodox endogenous money approach. While the MFFER endogeneity is ‘supply-led’ (balance of payment effect), the heterodox approach is ‘demand-led’ (bank credit effect). So, given the structural external constraint (not only due to the historical Argentinean balance of payments constraint, but also increased by the need for backing the monetary base with foreign reserves) the Central Bank of Argentina operated as a lender of last resort to an unsustainable expansion of public foreign indebtedness. The dollar credit rationing to the government was the limit to the central bank's accommodation policy.