Mundell-Fleming Research Articles

Bibliometric Analysis of the Interconnection Between Global Trade and Exchange Rate Policies

This study conducts a bibliometric analysis to explore the intricate relationships between global trade and exchange rate policies. Utilizing data extracted from major academic databases, the research synthesizes relevant literature from the past three decades to identify key thematic areas, influential authors, and the evolution of research trends over time. The analysis reveals how exchange rate volatility impacts global trade dynamics, highlights the theoretical underpinnings such as the Mundell-Fleming model and the Purchasing Power Parity, and identifies gaps in the current literature. The study's findings provide significant insights into the role of exchange rate management in economic stability and the interconnectedness of global markets. Practical implications are discussed with a focus on policy formulation and strategic financial management, while theoretical contributions offer enhancements to existing economic frameworks and propose new areas for empirical research. This research not only enriches the academic field of international economics but also serves as a foundational resource for policymakers and economic strategists navigating the complexities of global trade.

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.

How US Fiscal and Monetary Policy affect the GDP of Countries with Fixed and Flexible Exchange Rates: Estimates using Korean Data from 1963 to 2022

The simplest large country IS/LM/BP model (Mundell-Fleming Model) predicts that an increase in Government spending in the US would cause an increase in Gross Domestic Product (GDP) for countries with flexible exchange rate regimes and decreases in GDP for countries with fixed exchange rate regimes. In contrast, increases in the US money supply would cause an increase in GDP for countries with fixed exchange rate regimes and decreases in GDP for countries with flexible exchange rate regimes. This paper uses a solution to the omitted variables problem of regression analysis to estimate the effects of US fiscal and monetary policy on the Republic of Korea using quarterly data. The data splits into two sections: (1) from 1962 through 1997, Korea had a fixed exchange rate regime and (2) from 1998 through 2022, Korea had a flexible exchange rate regime. The empirical results fit the Large Country IS/LM/BP predictions.

The Mundell‑Fleming Model and Macroeconomic Stabilization Policies

This paper analyzes the fiscal policy implications set in the Mundell‑Fleming (M‑F) model and its effectiveness in emerging economies. It also widens the scope of the policy mix with alternative exchange rates. The empirical evidence about the economies of Chile (1991–2003) and Colombia (1994–2004), about institutions, fiscal policy rule, and the eurozone conditions (1999), were considered relevant The paper has three sections a. The budget‑surplus fiscal policy rule and policy effectiveness, b. The role of institutions in setting policy rules, c. The experience of the Chilean and Colombian economies concerning fiscal policy rules within the M‑F framework. The main conclusion is that as long as country risk is lower due to countercyclical fiscal policy rules, governments have an alternative means of getting funds at a lower international interest rate. The fiscal policy effect on GDP (output)becomes positive.

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.

The Dynamics of Exchange Rate Movements and Economic Growth in Nigeria: Does the Mundell–Fleming Model Stand?

The purpose of this study is to examine if exchange rate fluctuations have an impact on Nigeria’s economic performance using annual time series spanning from 1986 to 2020. The Generalised Autoregressive Conditional Heteroscedasticity (GARC) model was used as the study’s analytical technique. The result shows that in the long-run, exchange rate depreciation, inflation and the monetary policy rate have a significant long-term impact on the nation’s economic performance. By implication, the Naira/USD exchange rate fluctuation affects the economy negatively. Therefore, an appreciation in the value of the Naira relative to the USD will enhance Nigeria’s economic performance and vice versa. The net effect of this finding is that a persistent exchange rate fluctuation is detrimental to Nigeria’s economic stability and overall performance. With this finding, this study suggests the intervention of the monetary authority to reduce the level of fluctuation and ensure short-term and long-term stability in the exchange rate system. From the fiscal policy perspective, the government should consider trade interdependence and flexibility of production factors when formulating exchange rate policies. Keywords: Exchange Rate Fluctuations, Monetary Policy Rate, Inflation Rate, Economic Growth, Mundell-Fleming Model, & Nigeria JEL: C1, F4, F31 DOI: 10.7176/JESD/14-10-06 Publication date: May 31 st 2023

Analysis of USDJPY Price Fluctuations -- Based on the Huge Fluctuations in the First Fall of 2022

This paper focuses on the analysis using currency-related theories represented by the Mundell-Fleming model for the change in the price of USDJPY from the beginning of 2022 to the present. While incorporating special current events changes, the author pays attention to the impact of the traditional safe-haven currency status on the changes in the yen’s exchange rate and makes a reasonable forecast of its future trend.

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.

Macroeconomic impacts of the COVID-19 pandemic in the Czech Republic in the period of 2020-2021

This article provides a comprehensive summary of selected macroeconomic impacts of the COVID-19 pandemic in the Czech Republic, including an assessment of certain implemented fiscal and monetary policies, using data from 2019 (to compare the development of the economic situation during the COVID-19 pandemic with the period before the onset of the pandemic), 2020 and 2021 on a monthly or quarterly basis. Particular attention is paid to monetary policy effects, which, unlike fiscal policy, the Mundell-Fleming model considers effective in a small open economy with a freely floating exchange rate. The article also investigates the volume of fiscal measures taken to mitigate COVID-19 pandemic effects, the restrictive measures introduced to Czech households and firms as well as labour market developments during the period of 2019-2021, including quantification of the aggregate labour productivity index. The conclusions of the article are that, during the COVID-19 pandemic, macroeconomic indicators in the Czech Republic acted in accordance with the established partial hypotheses of the Mundell-Fleming model and in accordance with the hypothesis of the modified Phillips curve. Possible causes of the significant increase in inflation since September 2021 include 2020 nominal public and private sector salary growth, which showed faster growth than aggregate labour productivity, and the highly expansionary fiscal policy that characterized the 2021 pre-election period.

A Test of the Twin Deficits Hypothesis for the Kenyan Economy

This study examines the Twin Deficit Hypothesis (TDH), which posits that a government’s fiscal deficit occurs together with current account deficit through demand, interest rate and real exchange rate effects. The Keynesian theory and Mundell–Fleming framework prove the existence of the twin deficit relation, whereas the Ricardian equivalence theory negates any such relationship. Empirically also, certain studies prove the existence of the twin deficit relation, whereas several others challenge and prove that the two deficits have no relation with each other. This study therefore sought to test the Twin Deficit Hypothesis within the Kenyan context. Data was obtained from the International Financial Statistics and the World Economic Outlook of the International Monetary Fund (IMF). The data spans the period 1980-2017. An ARDL model was implemented to test the validity of the hypothesis. ARDL was preferred given the short span of data and the model’s suitability for small samples. The findings indicate that budget deficits have direct positive effects on the current account. These effects are significant at 1% level of significance. The indirect effects of budget deficits on the current account are also strong. Budget deficits, interest rate and the exchange rate have significant effects on the current account. An increase in budget deficits increases interest rates and appreciates the exchange rate. This leads to deterioration of the current account. Thus the real exchange rate has highly significant effects on the current account. The conclusion is that budget deficits and the exchange rate dominate in explaining movements in the current account in the long run. The results support the Mundell-Fleming model and the twin deficit hypothesis. Keywords: Twin Deficit Hypothesis , Mundell-Fleming Model, Budget Deficit, Current Account DOI: 10.7176/JESD/13-4-06 Publication date: February 28 th 2022

Determinants of Current Account Deficits in Sierra Leone: The Bound Testing Approach

This paper investigates the determinants of current account deficit in Sierra Leone, within the framework of the Auto Regressive Distributed Lag (ARDL) bound testing approach with annual time series data from 1980 to 2020. The unit root results reveal that the variables constitute both I(0) and I(1) series, while the bound test confirms the existence of cointegration. The results confirm that budget deficit, external debt and real exchange rate are the main drivers of current account deficit in the long run. Intuitively, the result reveals that budget deficit is positively associated with current account deficit, which confirms the validity of the twin deficit hypothesis. The result also suggests a positive relationship between external debt and current account deficit, denoting that the accumulation of debt leads to a worsening of the current account deficit. The findings also indicate a positive relationship between real exchange rate and current account deficit. This result is consistent with the Mundell-Flemming model, which predicts that an appreciation in the real exchange rate can adversely affect a country’s competitiveness position, leading to a worsening of the current account deficit. The short run result indicates that any disequilibrium in the model is corrected at the 65% adjustment speed annually. Also, the finding shows that, the coefficient of lagged current account deficit and budget deficit are the main determinants of current account deficit. The diagnostic result suggests that the explanatory variables account for 73% of the variations in current account deficit. Thus, the government should broaden the tax base and reinforce the implementation of an efficient tax administration system that could tackle tax evasion and tax avoidance, in order to enhance domestic revenue mobilization.

ЗАСТОСУВАННЯ МОДЕЛІ МАНДЕЛЛА-ФЛЕМІНГА В ЦИФРОВІЙ ЕКОНОМІЦІ: ПРИКЛАД УКРАЇНИ

Modern development of the noosphere, the emergence of new industries and a qualitative transformation of production and distribution relations are determined by widespread digitalization throughout the world. The main goals of digitalization are the development of innovations focused on the development of society 5.0, ensuring the free flow of data and capital. Considering the Mundell-Fleming model application as the instrument to support economic welfare it should be admitted the “impossible trinity” of the model and the lack of research to solve it. The paper investigates the Mundell-Fleming dilemma solution on the ground of digitalization. The research methodology is based on fundamental tenets of modern economics and general scientific methods, namely: induction, deduction, dialectical method and systematic approach, analysis and synthesis – all of these for analyzing the process of digitalization and to establish the principles, forms and foundations of the Mundell-Fleming model application in the digital dimension, systematization and generalization (to substantiate the phenomenon of digitalization), abstract-logical method (for recent tendencies substantiation), economic-mathematical (to compare and analyze data), institutional-comparative (for the analysis Mundell-Fleming model application in the digital economy). The paper studies the Mundell-Fleming model application in digital economy, it investigates global trends as well as peculiarities of digitalization in Ukrainian economy. We believe digitalization is the instrument to solve the Mundell-Fleming trilemma. The study reveals trends of banking digitalization as external as internal.

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).

Cryptocurrency, Money Demand and the Mundell-Fleming Model of International Capital Mobility

If cryptocurrencies are perceived as financial innovations that could disrupt domestic and international financial systems, it becomes imperative for economists to incorporate these virtual currencies into existing money market models. Cryptocurrencies, when fully adopted by the general public, would transmit into the financial system via money demand. Cryptocurrencies serve as money and non-money assets and have no perfect substitute, whereas they are perfect substitutes for M1. Therefore, how much impact would the popularity of cryptocurrencies have on domestic and international capital mobility? To isolate interest rate differentials across countries, the Mundell-Fleming model that assumes a constant interest rate in domestic and world economies was applied. Cryptocurrencies acquired in past periods that are acceptable worldwide would abrogate exchange rate differentials. This study theoretically finds that fiscal and monetary policies would have different impacts on income in economies with high cryptocurrency circulations compared to economies with only M1. Also, there is a critical interest rate where cryptocurrencies would be more attractive to investors than other non-money assets. Moreover, using the Keynesian aggregate income and aggregate expenditure model, without interest and exchange rate differentials, the worldwide use of cryptocurrencies in international trade would unveil the link between the twin deficits and international capital flows.

Are the Predictions of the Mundell-Fleming Model Applicable to Mexico?

According to the Mundell-Fleming model (Romer, 2006) under a floating exchange rate system, fiscal expansion is ineffective in raising output and causes real appreciation whereas monetary expansion raises output and causes real depreciation. Applying an extended Mundell-Fleming model, this paper employs a simultaneous-equation model to test whether the predictions of the Mundell-Fleming model would apply to Mexico. The GARCH process is employed in empirical work. This study finds that fiscal expansion reduces output and causes real appreciation and that monetary expansion raises output and leads to real depreciation. In addition, a higher real interest rate reduces output and causes real appreciation, and a higher real stock price results in real appreciation. Therefore, except for the impact of fiscal expansion on output, the Mundell-Fleming model applies to Mexico.

한국 방위산업의 수출 성장 방향에 관한 실증연구

This study is about the direction of growth in Korean defense industry Exports. South Korea's defense industry has grown over the past 50 years, and “Defense Reform 2.0” recognizes the defense industry as one of the ways for strengthening defense capabilities. However, it is also true that the defense industry is suffering from falling sales and the global economic downturn. As overseas demand grows, it is timely to examine the gap between export policy and reality. After then, it is necessary to discuss the direction of growth. Unlike previous studies, this study conducted empirical analysis on the growth of Korean defense industry exports using economic analysis models that take into account supply and demand aspects based on time series data. In other words, the decision factors were set and models were constructed based on the Cobb-Douglas production function and Mundell-Fleming model. As a result of the analysis, the factors that significantly affect the growth of Korean defense industry exports were the number of workers in the defense industry, world military expenditure, real effective exchange rate and economy crisis. The implications were divided into the government and the defense industry. If the policy and management direction are set based on the analysis and implications of this study, it is expected that Korean defense industry exports will continue to grow.

Monetary and Fiscal Policy Measures during the COVID-19 Economic Crisis in Russia

The author examines how monetary and fiscal policy influences the shocks facilities in the Russian economy caused by the coronavirus pandemic. The article aims to provide an economic assessment of the monetary measures by the Central Bank and the Government of the Russian Federation to overcome the consequences of the COVID-19 crisis. The author exploited the methods of content analysis, benchmarking, and logical analysis. The study covers the period of March — July 2020 and relies on the analysis of data from international organizations, analytical centers, mass media, official data sources of the Government of Russia and the Central Bank of the Russian Federation. The literature review and the analysis of the Mundell-Fleming model contribute to the better understanding of monetary policy of countries in its connection with fiscal policy. The author analyzed the monetary and fiscal measures against the COVID-19 crisis in Russia and other countries. The study provides the assessment of the COVID-19 shocks and the remedial actions. The conclusion is that when most economic activity is prohibited, lower interest rates cannot stimulate it in the short term. More visible are the efforts to maintain liquidity in the economy, as financial institutions often have troubles. During the analysis, the work focuses on the theoretical foundations of monetary policy and its connection with fiscal policy, as well as provides a number of stylized facts of its implementation in Russia during the coronavirus pandemic. This can be useful for further empirical research and practical recommendations in the field of monetary and fiscal policy in the Russian Federation.

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 origin of the money, endogeneity of money supply and balance of payments: Post Keynesian approach

Discussions about the origin of the money object are represented in two separate streams as orthodox and heterodox. Orthodox flow is expressed as a Metallist approach while looking at money as a means of exchange, heterodox flow is called Cartalist and emphasizes the phenomenon of authority in the object defined as money. Orthodox current sees the money supply as an inventory and external variable that can be increased and decreased by the central bank (CB) according to the money holding preferences of the people and money is demanded only for transaction purposes. The Mundell-Fleming Model (MFM), which is included in this flow and adds the balance of payments to analysis, accepts the money supply only endogenously in the fixed exchange rate system. The aim of this study is to explain the endogenity of money supply in an open economy within the framework of Post Keynesian economics (PKI), which is based on the fact that the investment and production process takes place in a purely monetary economy. In this framework, compensation thesis which provides an alternative explanation for open economies has brought about a new expansion that is completely different from the MFM. In this expansion, two types of financial systems are defined as overdraft and asset-based. The endogeneity of the money supply in both systems in the PK can continue to be valid. These opinions oppose the endogeneity approach of the money supply discussed in MFM, and concurrently, the externality of the money supply which exists in the flexible exchange system is not accepted.