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There is little material on the Mundell-Fleming model on the net that goes beyond lecture notes. Here is our own brief description with a few animated graphs. |
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| The Mundell-Fleming model |
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The Mundell-Fleming model, the work horse of open economy macroeconomics, focusses on the short to medium run.
For this limited horizon the Mundell-Fleming model lays out the policy options and the responses to inside and outside shocks for an open economy that interacts with other countries via trade in goods and services as well as cross-border capital flows.
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This second applet features a 2-country-version of the Mundell-Fleming model. Both countries are of the same size, and each is affected by what happens in the other. The interaction between and the policy options in these countries can be studied under different international monetary systems:
flexibles exchange rates
fixed exchange rates
a currency union. |
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This section of eur
macro tutor supplies three interactive Java-based applets that should help expand and deepen your understanding of the Mundell-Fleming model. The framework assumed in two of the applets is that international capital markets are fully integrated, so that capital may flow freely accross borders. In the third applet alternative degrees of capital mobility may be explored.
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This applet features the basic Mundell-Fleming model, which adds international trade and capital flows to the IS-LM model. It depicts a small open economy which is so small compared to the rest of the world that, while it is being affected by what goes on abroad, it does not really itself affect the outside world.
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Conceived independently by Canadian economist Robert Mundell and J. Marcus Fleming from Britain, the Mundell-Fleming model is also called IS-LM-FE model, emphasizing the three markets and equilibrium curves involved: IS for the goods market, LM for the money market, and FE for the foreign exchange market. The model's third label IS-LM-BP model showcases the balance of payments BP instead of the foreign exchange market, since one mirrors the other.
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The advanced version of the Mundell-Fleming model and the basic version of the Mundell-Fleming model share the perspective of a small open economy. In addition, users may now
modify the degree of capital mobility,
use taxes to conduct fiscal policy,
view how policy and outside disturbances affect the circular-flow-of-income identity.
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