tailieunhanh - SIMPLE OPEN ECONOMY MACRO WITH COMPREHENSIVE ACCOUNTING A RADICAL ALTERNATIVE TO THE MUNDELL FLEMING MODEL

This paper presents a stock flow model of two economies (together comprising the whole world) which trade goods and financial assets with one another. The accounting framework, though comprehensive in its own terms, is very much simplified (it has interest rates without interest payments and exchange rate changes without changes in relative prices) so as to reach the main conclusions as simply and easily as possible. The paper is (a contrario) critical of attempts to deploy open economy models which only analyse the operations of a single economy, without regard to the responses of the rest of the world. In. | SIMPLE OPEN ECONOMY MACRO WITH COMPREHENSIVE ACCOUNTING A RADICAL ALTERNATIVE TO THE MUNDELL FLEMING MODEL1 Wynne Godley Marc Lavoie Cambridge and Ottawa April 2004 ABSTRACT This paper presents a stock flow model of two economies together comprising the whole world which trade goods and financial assets with one another. The accounting framework though comprehensive in its own terms is very much simplified it has interest rates without interest payments and exchange rate changes without changes in relative prices so as to reach the main conclusions as simply and easily as possible. The paper is a contrario critical of attempts to deploy open economy models which only analyse the operations of a single economy without regard to the responses of the rest of the world. In particular the paper is critical of the influential Mundell-Fleming M-F model and finds that the characteristic M-F results are confuted once a full set of double entry accounts is used with all processes firmly located in historical time. KEYWORDS OPEN ECONOMY MACROECONOMICS STOCKS AND FLOWS MUNDELL-FLEMING 1 The authors are deeply indebted to Alex Izurieta and Mathieu Lequain for their contributions to this paper. 2 INTRODUCTION Ever since Mundell 1962 1963 and Fleming 1962 the Mundell-Fleming M-F model has been the workhorse of textbooks but it has also been influential in much professional work on open economy macro-economics. As is well known the M-F model is an extension of the IS-LM model so as to make it include a representation of how the exchange rate and the flows of net exports are determined. It aims to describe the responses of a small open economy and the constraints within which it operates in a world of free capital movements. Characteristic results are that under a regime of floating exchange rates countries lose the ability to run an independent fiscal policy while under fixed rates they lose control over monetary policy. The M-F model is scanty in that it only describes a single .