The Flexible Price Monetary Model

Peijie Wang ()
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Peijie Wang: University of Hull, Business School

Chapter 8 in The Economics of Foreign Exchange and Global Finance, 2009, pp 1-17 from Springer

Abstract: In contrast to the Mundell-Fleming model, the flexible price monetary model proposed by Frenkel (1976), as suggested by the name, works with the assumption that all prices are flexible. This means that the aggregate supply curve is vertical, and a shift in aggregate demand has no whatsoever effect on output. The level of output cannot be easily adjusted either up or down as it is mainly determined by supply side factors. Only a shift in aggregate supply can result in changes in output. Therefore, the IS part of IS–LM analysis is irrelevant here. The model assumes that purchasing power parity (PPP) holds continuously, so does the international Fisher effect (IFE) or uncovered interest rate parity (UIRP). It further assumes that money supply and real income are exogenously determined.

Keywords: Exchange Rate; Interest Rate; Money Supply; Real Income; Purchase Power Parity (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1007/978-3-642-00100-0_8

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