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8.4. VAR ANALYSIS OF MUNDELL—FLEMING 259When this is multiplied out, you getIt follows that0 = −θ 1 α + β/λ, (8.77)µ0 = πδα − [θ 1 + π δ + σ ]β. (8.78)λα = β/θ 1 λ. (8.79)Because α is proportional to β, weneedtoimposeanormalization. Letthisnormalization be β = p o − ¯p where p o ≡ p(0). Then α =(p o − ¯p)/θ 1 λ =−[p o − ¯p]/θλ, whereθ ≡−θ 1 . Using these values of α and β in (8.63) and(8.64), yieldsp(t) = ¯p +[p o − ¯p]e −θt , (8.80)s(t) = ¯s +[s o − ¯s]e −θt , (8.81)where (s o − ¯s) =−[p o − ¯p]/θλ. This solution gives the time paths for theprice level and the exchange rate.To characterize the system and its response to monetary shocks, we willwant to phase diagram the system. Going back to (8.58) and (8.61), wesee that ús(t) = 0 if and only if p(t) = ¯p, while úp(t) = 0 if and only ifs(t) − ¯s =(1 + σ/λδ)(p(t) − ¯p). These points are plotted in Figure 8.10. Thesystem displays a saddle path solution.