Chapter 3 Macroeconomic policy in an open economyChapter 3 Macroeconomic poli3.1 The problem of internal and external balanceMuch of the 1950s and 1960s literature was concerned with how the authorities might simultaneously achieve both internal and external balance.3.1 The problem of internal anFigure 3.1 The Swan diagramFigure 3.1 The Swan diagram国际金融(英文版)Chapter-3-Macroeconomic-Policy-in-an-Open课件国际金融(英文版)Chapter-3-Macroeconomic-Policy-in-an-Open课件Figure 3.2 Equilibrium of the model Figure 3.2 Equilibrium of the Figure 3.3 Surplus(a)and deficit(b)in the balance of paymentsFigure 3.3 Surplus(a)and deInternal and external balance under fixed exchange ratesA situation of fixed exchange rates and unemployment is depicted in figure 3.4.Internal and external balance Figure 3.4 Internal and external balance under a fixed exchange rateFigure 3.4 Internal and exterInternal and external balance under floating exchange ratesFigure 3.5 illustrates the case of monetary expansion under floating exchange rates.Internal and external balance Figure 3.5 A monetary expansion under floating exchange ratesFigure 3.5 A monetary expansiFiscal expansion under floating exchange ratesThe effects of a fiscal expansion on the exchange rate under floating rates depend crucially upon the slope of the BP schedule relative to the LM schedule.Fiscal expansion under floatinFigure 3.6 Case 1:fiscal expansion under floating exchange ratesFigure 3.6 Case 1:fiscal expFigure 3.7 Case 2:fiscal expansion under floating exchange ratesFigure 3.7 Case 2:fiscal exp A small open economy with perfect capital mobilityThe model assumes a small country facing perfect capital mobility.Any attempt to raise the domestic interest rate leads to a massive capital inflow to purchase domestic bonds pushing up the price of bonds until the interest rate returns to the world interest rate.A small open economy with perFigure 3.8 Fixed exchange rates and perfect capital mobilityFigure 3.8 Fixed exchange ratFigure 3.9 Floating exchange rates and perfect capital mobility Figure 3.9 Floating exchange The principle of effective market classification Mundell(1968)suggested that what he called the principle of effective market classification should be used by economic policy-makers in conjunction with Tinbergens instruments-targets rule.Mundells principle stated that Policies should be paired with the objectives on which they have the most influence.The principle of effective marFigure 3.10 The assignment problemFigure 3.10 The assignment pro Limitations of the Mundell-Fleming model-The Marshall-Lerner condition-Interaction of stocks and flow-Neglect of long-run constraints-Wealth effects-Neglect of supply-side factors-Treatment of capital flows-Exchange-rate expectations-Flexibility of policy instruments Limitations of the Mundell-Fl3.3 ConclusionsIn this chapter we have illustrated some important aspects concerning the conduct of economic policy in an open economy.Among the most important lessons for economic policy-makers is that they generally need as many independent policy instruments as they have targets.3.3 ConclusionsIn this chapterIn the real world the achievement of internal and external balance will be far more difficult that our theoretical analysis has suggested.We have seen that the relative effectiveness of fiscal and monetary policy is very much dependent upon the choice of exchange-rate regime.Although the Mundell-Fleming model has many limitations it none the less focuses attention on the difficulties and dilemmas facing policy-makers in an open economy.In the real world the achievem。
