The Mundell-Fleming Model: A Dirty Float Version

Waldo Mendoza

No 2019-477, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: A popular model in the teaching of macroeconomics of open economies at the undergraduate level is the Mundell-Fleming (MF). This model assumes that there is free capital mobility and takes into account two extreme exchange rate regimes: fixed and freely floating. But there is a third regime, currently of relevance to many central banks, which is not addressed in the MF: one in which the central bank sets the short-term interest rate and maintains a dirty-float exchange-rate regime. In this paper, an MF with these characteristics is presented. It is a simple, practical and user-friendly model that can be used to address contemporary issues, making it suitable for central banks or the teaching of macroeconomics at undergraduate level as a complement –or even a substitute– for the traditional MF. JEL Classification-JEL: E42, E52, E58, f41 Keywords: Dirty float, Mundell-Fleming Model, Imperfect capital mobility.

Pages: 27
Date: 2019
New Economics Papers: this item is included in nep-mon
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