宏觀經(jīng)濟學╱應(yīng)用經(jīng)濟學研究生系列教材

1、Chapter Twelve1CHAPTER 12The Open Economy Revisited: The Mundell-Fleming Model and the Exchange-rate RegimeA PowerPointTutorialTo Accompany MACROECONOMICS, 7th. EditionN. Gregory MankiwTutorial written by:Mannig J. SimidianB.A. in Economics with Distinction, Duke University M.P.A., Harvard Universit

2、y Kennedy School of GovernmentM.B.A., Massachusetts Institute of Technology (MIT) Sloan School of ManagementChapter Twelve2IntroducingeIncome, output, YLM*IS*Equilibrium exchange rateEquilibrium incomeThis model is a close relative of the IS-LM model; both stress the interaction between the goods ma

3、rket and the money market. Price levels are fixed, and both show short-run fluctuations in aggregate income. TheMundell-Fleming Model assumes an open economy in which trade andfinance are added; the IS-LM assumes a closed economy. Chapter Twelve3This model, often described as “the dominant policy pa

4、radigm for studying open-economy monetary and fiscal policy,” makes one important and extreme assumption: the economy being studied is a small open economy and there is perfect capital mobility, meaning that it can borrow or lend as much as it wants in world financial markets, and therefore, the eco

5、nomys interest rate is controlled by the world interest rate, mathematically denoted as r = r*.One key lesson about this model is that the behavior of an economydepends on the exchange rate regime it adoptsfloating or fixed.This model will help answer the question of which exchange rateregime should

6、 a nation adopt?Chapter Twelve4Under a system of floating exchange rates, the exchange rate is setby market forces and is allowed to fluctuate in response to changingeconomic conditions.The exchange rate e, adjusts to achieve simultaneous equilibrium inthe goods market and the money market. When som

7、ething changesthat equilibrium, the exchange rate is allowed to adjust to a newrate.Chapter Twelve5Assumption 1: The domestic interest rate is equal to the world interest rate (r = r*).Assumption 2: The price level is exogenously fixed since the model is used to analyze the short run (P). This impli

8、es that the nominal exchange rate is proportional to the real exchange rate.Assumption 3: The money supply is also set exogenously by the central bank (M).Assumption 4: Our LM* curve will be vertical because the exchange rate does not enter into our LM* equation.IS*: Y = C(Y-T) + I(r*) + G + NX(e)Le

9、ts start with two equations (notice the asterisk next to IS and LM to remind us that the equations hold the interest rate constant):The Small Open Economy Under Floating Exchange RatesLM*: M/P = L (r*,Y)Chapter Twelve6The IS* curve slopes downward because a higher exchange ratereduces net exports (s

10、ince a currency appreciation makes domestic goods more expensive to foreigners), which in turn, lowers aggregate income.Income, output, YIS*Exchange rate, eChapter Twelve7 Expenditure, EIncome, output, YY=EPlanned expenditure,E = C + I + G + NXExchange rate, eIncome, output, YExchange rate, e,Net ex

11、ports, NXNX(e)IS*An increase in the exchange rate, lowers net exports, which shifts planned expenditure downward and lowers income. The IS* curve summarizes these changes in the goods market equilibrium.(a)(c)(b)Chapter Twelve8The LM curve andthe world interest rate together determinethe level of in

12、come.The LM* curve isvertical because theexchange rate doesnot enter into the LM*equation.Recall the LM* equation is:M/P = L (r*,Y)Interest rate, rIncome, output, YLMExchange rate, eIncome, output, YLM*r = r*Chapter Twelve9eIncome, output, YLM*IS*eIncome, output, YLM*IS*IS*LM*When income rises in a

13、small open economy, due tothe fiscal expansion, the interest rate tries to rise but capital inflows from abroad put downward pressure on the interest rate. This inflow causes an increase in the demand for the currency pushing up its value and thus making domestic goods more expensive to foreigners (

14、causing a DNX). The DNX offsets the expansionary fiscal policy and the effect on Y.When the increase in the money supply puts downwardpressure on the domestic interest rate, capital flows outas investors seek a higher return elsewhere. The capitaloutflow prevents the interest rate from falling. The

15、outflow also causes the exchange rate to depreciate, making domestic goods less expensive relative to foreign goods, and stimulates NX. Hence, monetary policy influences the e rather than r.+D DG, or D DT +D De, no D DY+D DM -D De, +D DYChapter Twelve10FixedFixed Exchange Rates Exchange RatesUnder a

16、 fixed exchange rate, the central bank announces a valuefor the exchange rate and stands ready to buy and sell the domesticcurrency at a predetermined price to keep the exchange rate at its announced level. Fixed exchange rates require a commitmentof a central bank to allow the money supply to adjus

17、t to whatever levelwill ensure that the equilibrium exchange rate in the market for foreign-currency exchange equals the announced exchange rate.Most recently, China fixed the value of its currency against the U.S.dollar, which has resulted in a lot of tension between the two nations.It is important

18、 to realize that this exchange-rate system fixes the nominal exchange rate. Whether it fixes the real exchange rate dependson the time horizon.Chapter Twelve11eIncome, output, YLM*IS*eIncome, output, YLM*IS*IS*A fiscal expansion shifts IS* to the right. To maintainthe fixed exchange rate, the Fed mu

19、st increase themoney supply, thus increasing LM* to the right. Unlike the case with flexible exchange rates, there is nocrowding out effect on NX due to a higher exchange rate. If the Fed tried to increase the money supply bybuying bonds from the public, that would put down-ward pressure on the inte

20、rest rate. Arbitragers respondby selling the domestic currency to the central bank,causing the money supply and the LM curveto contract to their initial positions.+D DG, or D DT + D DYLM*+DMDM no D DYThe Mundell-Fleming ModelThe Mundell-Fleming Model Under Under FixedFixed Exchange Rates Exchange Ra

21、tesChapter Twelve12 FixedFixed vs. vs. Exchange Rate ConclusionsExchange Rate ConclusionsFixed Exchange RatesFloating Exchange Rates Fiscal Policy is Powerful. Monetary Policy is Powerless. Fiscal Policy is Powerless. Monetary Policy is Powerful.The Mundell-Fleming model shows that fiscal policy doe

22、s not influenceaggregate income under floating exchange rates. A fiscal expansioncauses the currency to appreciate, reducing net exports and offsettingthe usual expansionary impact on aggregate demand.The Mundell-Fleming model shows that monetary policy does not influence aggregate income under fixe

23、d exchange rates. Any attempt to expand the money supply is futile, because the money supplymust adjust to ensure that the exchange rate stays at its announced level.Hint: (Think of “floating” money.)Hint: (“Fixed” and “Fiscal” sound alike).Chapter Twelve13Policy in the Mundell-Fleming Model: Policy

24、 in the Mundell-Fleming Model: A SummaryA SummaryThe Mundell-Fleming model shows that the effect of almost any economic policy on a small open economy depends on whether the exchange rate is floating or fixed. The Mundell-Fleming model shows that the power of monetary and fiscal policy to influence

25、aggregate demand depends on the exchange rate regime.Chapter Twelve14A country with fixed exchange rates can, however, conducta type of monetary policy by deciding to change the level atwhich the exchange rate is fixed.A reduction in the official value of the currency is called a devaluation, and an

26、 increase in the value is called a revaluation.Chapter Twelve15The higher return will attract funds from the rest of the world, driving the domestic interest rate back down. And, if the domestic interest rate were below the world interest rate, r*, domestic residents would lend abroad to earn a high

27、er return, driving the domestic interest rate back up. In the end, the domestic interest rate would equal the world interest rate.What if the domestic interest rate were above the world interest rate?Chapter Twelve16Why doesnt this logic always apply? There are two reasons why interestrates differ a

28、cross countries:1) Country Risk: when investors buy U.S. government bonds, or makeloans to U.S. corporations, they are fairly confident that they will berepaid with interest. By contrast, in some less developed countries, itis plausible to fear that political upheaval may lead to a default on loanre

29、payments. Borrowers in such countries often have to pay higherinterest rates to compensate lenders for this risk.2) Exchange Rate Expectations: suppose that people expect the Frenchfranc to fall in value relative to the U.S. dollar. Then loans made in francswill be repaid in a less valuable currency

30、 than loans made in dollars. Tocompensate for the expected fall in the French currency, the interest rate in France will be higher than the interest rate in the United States.Chapter Twelve17Differentials in the Mundell-Fleming ModelDifferentials in the Mundell-Fleming ModelTo incorporate interest-r

31、ate differentials into the Mundell-Flemingmodel, we assume that the interest rate in our small open economyis determined by the world interest rate plus a risk premium q. r = r* + qThe risk premium is determined by the perceived political risk ofmaking loans in a country and the expected change in t

32、he real interestrate. Well take the risk premium q as exogenously determined.For any given fiscal policy, monetary policy, price level, and riskpremium, these two equations determine the level of income andexchange rate that equilibrate the goods market and the money market.IS*: Y = C(Y-T) + I(r* +

33、q q) + G + NX(e)LM*: M/P = L (r* + q q,Y)Chapter Twelve18Now suppose that political turmoil causes the countrys risk premium qto rise. The most direct effect is that the domestic interest rate r rises.The higher interest rate has two effects:1) IS* curve shifts to the left, because the higher intere

34、st rate reducesinvestment.2) LM* shifts to the right, because the higher interest rate reduces thedemand for money, and this allows a higher level of income for anygiven money supply. These two shifts cause income to rise and thus push down the equilibriumexchange rate on world markets.The important

35、 implication: expectations of the exchange rate are partiallyself-fulfilling. For example, suppose that people come to believe that theFrench franc will not be valuable in the future. Investors will place alarger risk premium on French assets: q will rise in France. Thisexpectation will drive up Fre

36、nch interest rates and will drive down the value of the French franc. Thus, the expectation that a currency will losevalue in the future causes it to lose value today. The next slide willdemonstrate the mechanics.Chapter Twelve19eIncome, output, YLM*IS*LM*IS*An Increase in the Risk PremiumAn Increas

37、e in the Risk PremiumAn increase in the risk premium associated with a country drives upits interest rate. Because the higher interest rate reduces investment,the IS* curve shifts to the left. Because it also reduces moneydemand, the LM* curve shifts to the right. Income rises, and theexchange rate

38、depreciates.Is this really where the economy ends up? In the next slide, well see thatincreases in country risk are undesirable.Chapter Twelve20There are three reasons why, in practice, such a boom in income does not occur. First, the central bank might want to avoid the large depreciation of the do

39、mestic currency and therefore, may respondby decreasing the money supply M. Second, the depreciation of thedomestic currency may suddenly increase the price of domestic goods,causing an increase in the overall price level P. Third, when some eventincrease the country risk premium q, residents of the

40、 country mightrespond to the same event by increasing their demand for money (forany given income and interest rate), because money is often thesafest asset available. All three of these changes would tend to shiftthe LM* curve toward the left, which mitigates the fall in the exchangerate but also t

41、ends to depress income.Chapter Twelve211) Allows monetary policy to be usedfor other purposes such as stabilizingemployment or prices.1) Monetary policy is committedto the single goal of maintainingthe announced level.2) May lead to greater volatility inincome and employment.1) Exchange-rate volatil

42、itycreates uncertainty andmakes trade more difficult.2) Tempers overuse ofmonetary authority.1) More speculation andvolatility expected.Chapter Twelve22A speculative attack is a case where a change in investors perceptionsmakes a fixed rate untenable.To avoid these kinds of attacks, some economists

43、suggest the use of acurrency board, an arrangement by which the central bank holdsenough foreign currency to back each unit of the domestic currency.The next for a nation is to consider dollarization, a plan in whichthe domestic currency is abandoned and the U.S. dollar is used instead.Chapter Twelve23It is impossible for a nation to have free capital flows, a fixedexchange rate, and independent monetary policy.Free capital flowsIndependentMonetaryPolicyFixedExchangeRatesOption 1:United StatesOption 3:Chi