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260 CHAPTER 8. THE MUNDELL-FLEMING MODELs.p=0.s=0pFigure 8.10: Phase diagram for the Dornbusch model.
8.4. VAR ANALYSIS OF MUNDELL—FLEMING 261Problems1. (Static Mundell-Fleming with imperfect capital mobility). Let thetrade balance be given by α(s + p ∗ − p) − ψy. A real depreciationraises exports and raises the trade balance whereas an increase inincome leads to higher imports which lowers the trade balance. Letthe capital account be given by θ(i−i ∗ ), where 0 < θ < ∞ indexes thedegree of capital mobility. We replace (8.3) with the external balanceconditionα(s + p ∗ − p) − ψy + θ(i − i ∗ )=0,that the balance of payments is 0. (We are ignoring the service account.)When capital is completely immobile, θ = 0 and the balance ofpayments reduces to the trade balance. Under perfect capital mobility,θ = ∞ implies i = i ∗ which is (8.3).(a) Call the external balance condition the FF curve. Draw the FFcurve in r, y space along with the LM and IS curves.(b) Repeat the comparative statics experiments covered in this chapterusing the modiÞed external balance condition. Are any of theresults sensitive to the degree of capital mobility? In particular,how do the results depend on the slope of the FF curve in relationto the LM curve?2. How would the Mundell-Fleming model with perfect capital mobilityexplain the international co-movements of <strong>macroe</strong>conomic variables inChapter 5?3. Consider the Dornbusch model.(a) What is the instantaneous effect on the exchange rate of a shockto aggregate demand? Why does an aggregate demand shocknot produce overshooting?(b) Suppose output can change in the short run by replacing the IScurve (8.7) with y = δ(s − p) +γy − σi + g, replace the priceadjustment rule (8.8) with úp = π(y−ȳ), where long-run output isgiven by ȳ = δ(¯s − ¯p)+γȳ − σi ∗ + g. Under what circumstancesis the overshooting result (in response to a change in money)robust?
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To Shirley, Laurie, and Leslii
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CONTENTSvii11 Balance of Payments C
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80 CHAPTER 3. THE MONETARY MODEL3.1
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84 CHAPTER 3. THE MONETARY MODEL0 <
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104 CHAPTER 3. THE MONETARY MODELwh
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106 CHAPTER 4. THE LUCAS MODEL(76)
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108 CHAPTER 4. THE LUCAS MODELsubje
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110 CHAPTER 4. THE LUCAS MODELeach
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112 CHAPTER 4. THE LUCAS MODELcompl
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120 CHAPTER 4. THE LUCAS MODELn t =
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124 CHAPTER 4. THE LUCAS MODELTable
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126 CHAPTER 4. THE LUCAS MODEL4.5 C
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128 CHAPTER 4. THE LUCAS MODELTable
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132 CHAPTER 4. THE LUCAS MODEL1.02A
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134 CHAPTER 4. THE LUCAS MODELAppen
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136 CHAPTER 4. THE LUCAS MODELProbl
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138 CHAPTER 5. INTERNATIONAL REAL B
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162CHAPTER 6. FOREIGN EXCHANGE MARK
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208 CHAPTER 7. THE REAL EXCHANGE RA
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318 CHAPTER 10. TARGET-ZONE MODELSa
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324 CHAPTER 10. TARGET-ZONE MODELS
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326 CHAPTER 10. TARGET-ZONE MODELS
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328 CHAPTER 11. BALANCE OF PAYMENTS
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358 AUTHOR INDEXFama, E.F., 161, 16
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Subject IndexAAbsorption, 16, 230AI
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362 SUBJECT INDEXEfficient capital
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364 SUBJECT INDEXMethod of undeterm
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366 SUBJECT INDEXRisk neutrality, 9
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368 SUBJECT INDEXImpulse response a
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