The Mundell-Fleming Model Revisited

In: The American economist: journal of the International Honor Society in Economics, Omicron Delta Epsilon, Volume 46, Issue 1, p. 42-49

Abstract

With the globalization of the world economy, improved international capital mobility, and the popularity of fixed (pegged) exchange rates among small developing and transition economies, the Mundell-Fleming model has reasserted its importance as an analytical tool. This paper surveys the Mundell-Fleming model in major macroeconomics and international economics textbooks. In the graphical presentations, all textbooks use the traditional IS-LM curves in the (y, i) plane except Mankiw who presents a model in the (y, e) plane with a unique addition of the effect of import restriction policies. It is generally known that fiscal expansions will worsen the trade balance. A synthesized model is presented in which a necessary condition for such effect is derived.