Mundell Fleming Model

IS/LM Framework:
When prices are fixed then, as we know from IS-LM model, the aggregate supply curve is
horizontal. The implication of ASC becoming horizontal is that now output is demand determined
and supply side is redundant. This case is exactly opposite to Say’s law that supply side is
determines the output and demand side is not important.
Demand in an economy is constrained by physical supply of goods and items. If the demand goes
up then the prices go up too because the supply cannot be increased. But here the prices are rigid
and producers are ready to supply at rigid prices so supply is not a constraint anymore. Output is
completely demand determined. The prices are rigid and the supply side is redundant then we are
only left with demand side to study. The determination of demand comes from the following four
markets: the goods market, the money market, the bond market and the For-ex market. Money
market and bonds market are interlinked in a manner that both money and bonds are similar assets.
If money and bonds are the only two assets present in the economy, then according to Walrus law
if money market is in equilibrium then bonds market should be in equilibrium. That is why we
don’t need to study bond market if we are studying money market equilibrium. Let us consider an
open economy IS-LM model.
Goods Market:

𝑌 =𝐶+𝐼+𝐺

𝐶 = 𝐶(𝑌 𝑑 , 𝐴⁄𝑃 ) 𝑎𝑠𝑠𝑢𝑚𝑒 𝐴⁄𝑃 = 𝑀⁄𝑃 𝑎𝑠 𝑤𝑒 𝑎𝑟𝑒 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑖𝑛𝑔 𝑜𝑛𝑙𝑦 𝑚𝑜𝑛𝑒𝑦 𝑚𝑎𝑟𝑘𝑒𝑡
𝜕𝐶 𝜕𝐶
0< = 𝐶 𝑌 𝑑 < 1 𝑎𝑛𝑑 = 𝐶𝑀⁄𝑃 > 0
𝜕𝑌 𝑑 𝜕 𝑀 ⁄𝑃

𝑌𝑑 = 𝑌 − 𝑇

𝐼 = 𝐼(𝑟)
𝑟 = 𝑖 − 𝜋 𝑒 𝑎𝑛𝑑 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑓𝑢𝑡𝑢𝑟𝑒 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑠 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑒𝑑 𝑧𝑒𝑟𝑜 𝑠𝑜 𝑟 = 𝑖
𝜕𝐼
= 𝐼𝑟 < 0
𝜕𝑟
𝐺 = 𝐺̅ 𝑎𝑛𝑑 𝑇 = 𝑇̅

𝑁𝑋 = 𝑋 − 𝑀

𝑋 = 𝑋(𝑌 𝐹 , 𝐸)
𝜕𝑋 𝜕𝑋
= 𝑋𝑌 𝐹 > 0, = 𝑋𝐸 > 0
𝜕𝑌𝐹 𝜕𝐸
𝑀′ = 𝑀′ (𝑌, 𝐸)
 𝜕𝑀′ 𝜕𝑀′
= 𝑀′ 𝑌 > 0, = 𝑀′ 𝐸 < 0
𝜕𝑌 𝜕𝐸
Goods Market Equilibrium Condition:

𝑌 = 𝐶(𝑌 𝑑 , 𝐴⁄𝑃) + 𝐼(𝑟) + 𝐺̅ + 𝑋(𝑌𝑓 , 𝐸) − 𝐸𝑀′ (𝑌, 𝐸) −𝐴−

Taking total differential of A

𝑑𝑌 = 𝐶𝑌 𝑑 𝑑𝑌 𝑑 + 𝐶𝑀⁄𝑃 𝑑 𝑀 ⁄𝑃 + 𝐼𝑟 𝑑𝑟 + 𝑑𝐺 + 𝑋𝑌 𝐹 𝑑𝑌 𝐹 + 𝑋𝐸 𝑑𝐸 − 𝑀′ 𝑑𝐸 − 𝐸𝑀′ 𝑌 𝑑𝑌 − 𝐸𝑀′ 𝐸 𝑑𝐸

1 𝑀
𝑑𝑌 = 𝐶𝑌 𝑑 𝑑(𝑌 − 𝑇) + 𝐶𝑀⁄𝑃 ( 𝑑𝑀 − 2 𝑑𝑃) + 𝐼𝑟 𝑑(𝑖 − 𝜋 𝑒 ) + 𝑑𝐺 + 𝑋𝑌 𝐹 𝑑𝑌 𝐹
𝑃 𝑃
+ (𝑋𝐸 − 𝑀′ − 𝐸𝑀′ 𝐸 )𝑑𝐸 − 𝐸𝑀′ 𝑌 𝑑𝑌

𝐴𝑠𝑠𝑢𝑚𝑒 (𝑋𝐸 − 𝑀′ − 𝐸𝑀′ 𝐸 ) = 𝛽 > 0 𝑎𝑛𝑑 𝑑𝜋 𝑒 = 0 𝑓𝑜𝑟 𝑠𝑡𝑎𝑡𝑖𝑐 𝑎𝑛𝑎𝑙𝑦𝑠𝑖𝑠

Re-arranging the above equation yields the following expression

(1 − 𝐶𝑌 𝑑 − 𝐸𝑀′ 𝑌 )𝑑𝑌
1 𝑀
= −𝐶𝑌 𝑑 𝑑𝑇 + 𝐶𝑀⁄𝑃 𝑑𝑀 − 2 𝐶𝑀⁄𝑃 𝑑𝑃 + 𝐼𝑟 𝑑𝑖 + 𝑑𝐺 + 𝑋𝑌 𝐹 𝑑𝑌 𝐹 + 𝛽𝑑𝐸 − 𝐴′ −
𝑃 𝑃
For the purpose of calculating the slope of the IS curve all the variables except i and Y are zero
which yields us the following equation and consequently the slope of IS curve:

(1 − 𝐶𝑌 𝑑 − 𝐸𝑀′ 𝑌 )𝑑𝑌 = 𝐼𝑟 𝑑𝑖

𝑑𝑖 (1 − 𝐶𝑌 𝑑 − 𝐸𝑀′ 𝑌 ) 𝐴
= = <0
𝑑𝑌 𝐼𝑟 𝐼𝑟
𝑎𝑠 𝐴 = 1 − 𝐶𝑌 𝑑 − 𝐸𝑀′ 𝑌 > 0

Money Market:

𝑀𝑑 𝑀 𝑠
=
𝑃 𝑃
𝑀𝑑 = 𝐿(𝑌, 𝑖)

𝑀𝑠 𝑀̅
𝐿𝑌 > 0, 𝐿𝑖 < 0 𝑎𝑛𝑑 =
𝑃 𝑃
Money Market Equilibrium Condition:
𝑀
= 𝐿(𝑌, 𝑖) −𝐵−
𝑃
Taking total differential of B
 1 𝑀
𝑑𝑀 − 2 𝑑𝑃 = 𝐿𝑌 𝑑𝑌 + 𝐿𝑖 𝑑𝑖 − 𝐵′ −
𝑃 𝑃
For the purpose of ascertaining the slope of LM curve all variables except i and Y are zero which
yields the following equation and consequently the slope of LM curve:

𝐿𝑌 𝑑𝑌 = −𝐿𝑖 𝑑𝑖
𝑑𝑖 𝐿𝑌
=− >0
𝑑𝑌 𝐿𝑖
Normally at this point in our derivation of model we can easily calculate the multiplier and check
the effect of variables on our goods market and money market equilibrium but before we move
forward to multipliers there two important issues to attend to.
Issues:
i. There are two issues in the conventional open economy IS-LM equilibrium analysis
i.e. there is no treatment for trade surplus or trade deficit. If we assume that trade
surplus and trade deficits are equal then equilibrium value of output can be found but
if they are not then IS-LM model doesn’t provide a treatment for this discrepancy in
the external account.
ii. G, T, M are policy variables and are all exogenous among other exogenous variables.
Again we can assume a situation where government expenditures are equal to
government revenue. But if G is not equal to T then there is a discrepancy in the form
of either budget deficit or budget surplus. If we try to cover this discrepancy through
money market M will become endogenous as it’s determined through difference of two
variables of the model. So for any two variables to be balance and kept exogenous one
has to be endogenous.
To get rid of these complications we have to take few assumptions:
(a) The external account is in equilibrium:

𝑋 − 𝐸𝑀 = 0
Then the transformed IS equation will be

𝑌 = 𝐶(𝑌 𝑑 , 𝑀⁄𝑃) + 𝐼(𝑟) + 𝐺̅

And the corresponding differential form will be
1 𝑀
(1 − 𝐶𝑌 𝑑 )𝑑𝑌 = −𝐶𝑌 𝑑 𝑑𝑇 + 𝐶𝑀⁄𝑃 𝑑𝑀 − 2 𝐶𝑀⁄𝑃 𝑑𝑃 + 𝐼𝑟 𝑑𝑖 + 𝑑𝐺 − 𝐴′′ −
𝑃 𝑃
(b) We ignore the budget imbalance.
After assumptions (a) and (b) our new system of equation will be A’’ and B’. The
exogenous variable of the models are dG, dM, dP and dT. The endogenous variables are
dY and di. Converting the system in to matrix form for analysis:
 1 𝑀 𝑑𝑇
−𝐶𝑌 𝑑 1 𝐶 − 𝐶𝑀⁄𝑃
[
1 − 𝐶𝑌 𝑑 −𝐼𝑟 𝑑𝑌
][ ] = [ 𝑃 𝑀⁄𝑃 𝑃 2 𝑑𝐺
][ ]
𝐿𝑌 𝐿𝑖 𝑑𝑖 1 𝑀 𝑑𝑀
0 0 − 2
𝑃 𝑃 𝑑𝑃
1 − 𝐶𝑌 𝑑 −𝐼𝑟
∆= | | = 𝐿𝑖 (1 − 𝐶𝑌 𝑑 ) + 𝐼𝑟 𝐿𝑌 < 0
𝐿𝑌 𝐿𝑖
Using Crammer’s rule now we can solve for multiplier expressions:
1 −𝐼𝑟
𝑑𝑌 |0 𝐿𝑖 | 𝐿𝑖
= = >0
𝑑𝐺 ∆ ∆
1
𝐶𝑀⁄𝑃 −𝐼𝑟
|𝑃 |
1 1 𝐼
𝑑𝑌 𝐿𝑖 𝐿𝑖 (𝑃 𝐶𝑀⁄𝑃 ) + 𝑃𝑟
= 𝑃 = >0
𝑑𝑀 ∆ ∆
−𝐶𝑌 𝑑 −𝐼𝑟
𝑑𝑌 | | −𝐿 𝐶
0 𝐿𝑖 𝑖 𝑌𝑑
= = <0
𝑑𝑇 ∆ ∆
Up till now, the clear-cut demand side variables that are affecting output are G & M and they are
also exogenous. The third variable T can affect output both ways; demand side effect is through
disposable income and supply side effect is through real wage. Since the supply side is taken as
redundant so all three policy variables are exogenously affecting output from demand side. We
quantify the effect of these variables on output.
The effect of demand side variables on output is not zero if there is nominal rigidity in the economy
hence potential output will not be the same as actual output. So business cycle exists due to
rigidities. For example positive government expenditure and money shock will take the output
above potential output and positive tax shock will bring the actual output below the potential
output.
Now we can say if the demand is rising then economy is boom and if demand is falling then the
economy is in recession. This means that great depression was a demand side phenomenon.
Keynes said that demand management policies should be adopted. If the economy is in recession
then according to RBC the economy is in equilibrium but according to nominal rigidity theory it’s
disequilibrium. If there is already market equilibrium and markets are competitive and govt
intervenes then the welfare cannot be increased as according to first welfare theorem decentralized
equilibrium is Pareto efficient. Now we are saying that business cycles are disequilibrium. So if
equilibrium is Pareto efficient then disequilibrium is Pareto inefficient. So govt intervention can
increase welfare in the economy. Government can use counter-cyclical policies to counter the
business cycles using demand side variables.
If at the end of the day demand management has to be done then which variable should be used?
G or M? This is the beginning point of Keynesians and Monetarists controversy. If we compare
G, T, M we can readily see that government expenditure is the only variable that directly affects
output whereas, M and T both indirectly affect output through their separate channels. Both M and
T are incentive based policies; increasing money for example will decrease interest rate which will
encourage investment. The effect will take place in long run through appropriate multiplier but the
important thing to note here is that interest rate is not the only determinant of investment. If the
investor has trust issues then he will not invest regardless of the low interest rate. Since G has a
direct 1-1 effect so Keynes says G should be the instrument.
Since Keynesian does not recognize Pigou’s wealth effect on individual consumption so its effect
in Keynesian model is zero. Moreover the interest sensitivity of money demand is too high. So
money supply will prove to be a very weak variable for demand management and the results will
be insignificant changes in output as changes in money supply will have very small impact on
interest rate. On the contrary Classical’s/ Monetarists do recognize the wealth effect so change in
money stock will at first increase consumption and subsequently output. Moreover interest
sensitivity of money demand is very low. Now the change in money supply will have significant
effects on interest rates and eventually the output through investment.
The behavior of money is different in Keynesian and Classical models. In Keynesian model money
has transactionary motives through income and speculative motives through interest rate that’s
why money demand is sensitive to changes in interest rate. But in Classical model the prime motive
to demand money is consumption and consumption is not sensitive to changes in interest rate hence
the low interest sensitivity to money demand. According to neo-classicals, investment is a function
of interest rate but on the opposite Keynesian investment function depends upon overall demand.
Interest rate has a weak effect on investment in Keynesian model but high in Classical model.
We can look at an extreme case in Keynesian model where interest sensitivity of money demand
is infinite then the economy will fall into liquidity trap. Now, a change in money supply has zero
effects on interest rates. People are willing to hold liquid assets rather than investing it in real assets
at given interest rate in the economy. There will be no investment due to changes in money. So we
can say that monetary policy is ineffective in liquidity trap if the wealth effect is also non-existent
but if the wealth effect is existent then monetary policy can have somewhat positive effect on
output. The government expenditure however will still carry a positive effect in liquidity trap. This
positive impact will be bigger than normal because government expenditure will not crowd out the
private investment.
𝑑𝑌 1
lim = >0
𝐿𝑖 →∞ 𝑑𝐺 1 − 𝐶𝑌 𝑑
1
𝑑𝑌 𝐶𝑀⁄𝑃
lim = 𝑃 = 𝑖𝑛𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒
𝐿𝑖 →∞ 𝑑𝑀 1 − 𝐶𝑌 𝑑

The other extreme case will be in Monetarist model where interest sensitivity of money demand
will come down to zero. The government expenditure effect on output will be zero but monetary
policy will be effective.
𝑑𝑌 1
lim = = 𝑖𝑛𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒
𝐿𝑖 →0 𝑑𝐺 1 − 𝐶𝑌 𝑑 + ∞
 1
𝑑𝑌 𝐶𝑀⁄𝑃
lim = 𝑃 >0
𝐿𝑖 →0 𝑑𝑀 1 − 𝐶𝑌 𝑑

We have proven that in IS-LM model if the prices are rigid then demand side policies are effective
and supply side is redundant. When aggregate demand in the economy rises it creates boom and
when aggregate demand is low it creates recession. So through rigidity in prices we have explained
the existence of business cycles. Another source of nominal rigidity is rigidity in nominal wages.
We will now study the case of nominal wage rigidity and flexible prices. If the prices are flexible
then IS-LM model fails because the baseline assumption is fixed prices.

𝐴𝑑𝑌 = −𝐶𝑌 𝑑 𝑑𝑇 + 𝐼𝑟 𝑑𝑖 + 𝑑𝐺 + 𝑋𝑌 𝐹 𝑑𝑌 𝐹 + 𝛽𝑑𝐸 − 𝐴′ −

1 𝑀
𝑑𝑀 − 2 𝑑𝑃 = 𝐿𝑌 𝑑𝑌 + 𝐿𝑖 𝑑𝑖
𝑃 𝑃
𝑑𝑀 = 𝑑𝐷 + 𝑑𝑅 𝑎𝑠 𝑀 = 𝐷 + 𝑅 𝑏𝑒𝑐𝑎𝑢𝑠𝑒 𝑛𝑜𝑤 𝑅̇ 𝑖𝑠 𝑎𝑙𝑠𝑜 𝑎𝑓𝑓𝑒𝑐𝑡𝑖𝑛𝑔 𝑚𝑜𝑛𝑒𝑦 𝑚𝑎𝑟𝑘𝑒𝑡𝑠
1 1 𝑀
𝐿𝑌 𝑑𝑌 + 𝐿𝑖 𝑑𝑖 = 𝑑𝐷 + 𝑑𝑅 − 2 𝑑𝑃 − 𝐵′ −
𝑃 𝑃 𝑃
Balance of Payment:
Balance of payment equation has to be introduced in our model to deal with the possibility of
deficit or surplus arising out of the trade account inside current account. In case there is deficit or
surplus the difference will be settled through capital account. Now the capital account keeps record
of the capital growth which is both the function of domestic as well as foreign interest rates. If
there is any deficit or surplus left that couldn’t be absorbed by the capital account then it will move
towards the international reserves. The functional form of capital growth shows us that higher the
domestic interest rate will increase capital inflows and vice versa.

𝐾 = 𝐾(𝑖 − 𝑖𝑓)
𝜕𝐾
= 𝐾𝑖−𝑖𝑓 > 0
𝜕(𝑖 − 𝑖𝑓)

(𝑋 − 𝐸𝑀) + 𝐾(𝑖 − 𝑖𝑓) = 𝑅̇

Balance of Payment Equilibrium Condition:

𝑅̇ = 𝑋(𝑌 𝐹 , 𝐸) − 𝐸𝑀′ (𝑌, 𝐸) + 𝐾(𝑖 − 𝑖𝑓) − 𝐶 −

Taking total differential

𝑑𝑅̇ = 𝑋𝑌 𝐹 𝑑𝑌 𝐹 + 𝑋𝐸 𝑑𝐸 − 𝑀′ 𝑑𝐸 − 𝐸𝑀′ 𝑌 𝑑𝑌 − 𝐸𝑀′ 𝐸 𝑑𝐸 + 𝐾𝑖−𝑖𝑓 𝑑𝑖 − 𝐾𝑖𝑓 𝑑𝑖𝑓

𝑑𝑅̇ = 𝑋𝑌 𝐹 𝑑𝑌 𝐹 − 𝐸𝑀′ 𝑌 𝑑𝑌 + 𝛽𝑑𝐸 + 𝐾𝑖−𝑖𝑓 𝑑𝑖 − 𝐾𝑖𝑓 𝑑𝑖𝑓 − 𝐶′ −

For the purpose of finding the slope all variables except I and Y are zero which will yield the
following equation and consequently the slope of BOP curve:
 0 = −𝐸𝑀′ 𝑌 𝑑𝑌 + 𝐾𝑖−𝑖𝑓 𝑑𝑖

𝑑𝑖 𝐸𝑀′ 𝑌
= >0
𝑑𝑌 𝐾𝑖−𝑖𝑓

Now our system of equation is A’, B’ and C’. Before converting the equations into matrix form the
important thing to note here is that now we can do policy analysis for both long run and short run
for fixed and flexible exchange rate systems. So we will pick them one by one and see the effects
of policy in each separate case:
(i) Short-run Effects under Fixed ER system:
In this case our endogenous variables will be dY, di and dṘ and dE = 0.
𝑑𝑇
−𝐶𝑌 𝑑 1 𝑋𝑌 𝐹 0 0 0 0 𝑑𝐺
𝐴 −𝐼𝑟 0 𝑑𝑌 𝑑𝑌 𝐹
1 1 𝑀
[ 𝐿𝑖 𝐿𝑌 0] [ 𝑑𝑖 ] = [ 0 0 0 − 2 0 ] 𝑑𝐷
𝐸𝑀′ 𝑌 −𝐾𝑖 ′ 1 𝑑𝑅̇ 𝑃 𝑃 𝑃 𝑑𝑅
0 0 𝑋𝑌 𝐹 0 0 0 −𝐾𝑖 ′
𝑑𝑃
[ 𝑑𝑖𝑓 ]
𝐴 −𝐼𝑟 0
∆′ = | 𝐿𝑖 𝐿𝑌 0| = 𝐴(𝐿𝑖 ) + 𝐼𝑟 (𝐿𝑌 ) > 0
𝐸𝑀′ 𝑌 −𝐾𝑖 ′ 1
1 −𝐼𝑟 0
|0 𝐿𝑌 0|
𝑑𝑌 0 −𝐾𝑖 ′ 1 𝐿𝑖
= = >0
𝑑𝐺 ∆′ ∆′
0 −𝐼𝑟 0
1
| 𝐿𝑌 0|
𝑃
𝑑𝑌 0 −𝐾𝑖 ′ 1 𝐼𝑟
= = >0
𝑑𝐷 ∆′ 𝑃∆′
(ii) Long-run Effects under Fixed ER system:
In long-run dṘ = 0, dE = 0 and our endogenous variables become dY, di and dR.
𝑑𝑇
−𝐶𝑌 𝑑 1 𝑋𝑌 𝐹 0 0 0 𝑑𝐺
𝐴 −𝐼𝑟 0 𝑑𝑌 1 𝑀 𝑑𝑌 𝐹
[ 𝑖𝐿 𝐿𝑌 −1/𝑃 ] [ 𝑑𝑖 ] = [ 0 0 0 − 2 0 ] 𝑑𝐷
𝐸𝑀′ 𝑌 −𝐾𝑖 ′ 0 𝑑𝑅 𝑃 𝑃
0 0 𝑋𝑌 𝐹 0 0 −𝐾𝑖 ′ 𝑑𝑃
[ 𝑑𝑖𝑓 ]
 𝐴 −𝐼𝑟 0
1 𝐾𝑖 ′ −𝐸𝑀′ 𝑌
∆′′ = | 𝐿𝑖 𝐿𝑌 − | = 𝐴 ( ) + 𝐼𝑟 ( )<0
𝑃 𝑃 𝑃
𝐸𝑀′ 𝑌 −𝐾𝑖 ′ 0
1 −𝐼𝑟 0
1
|0 𝐿𝑌 − 𝑃|
𝑑𝑌 0 −𝐾𝑖 ′ 0 −𝐾𝑖 ′
= = >0
𝑑𝐺 ∆′′ 𝑃∆′′
0 −𝐼𝑟 0
1 1
| 𝐿𝑌 − 𝑃|
𝑃
𝑑𝑌 0 −𝐾𝑖 ′ 0
= =0
𝑑𝐷 ∆′′
(iii) Effects under Flexible ER system:
Under flexible exchange rate system dR and dṘ are both zero and dE is endogenous.
𝑑𝑇
−𝐶𝑌 𝑑 1 𝑋𝑌 𝐹 0 0 0 𝑑𝐺
𝐴 −𝐼𝑟 −𝛽 𝑑𝑌
1 𝑀 𝑑𝑌 𝐹
[ 𝐿𝑖 𝐿𝑌 0 ] [ 𝑑𝑖 ] = [ 0 0 0 − 2 0 ] 𝑑𝐷
𝐸𝑀′ 𝑌 −𝐾𝑖 ′ −𝛽 𝑑𝐸 𝑃 𝑃
0 0 𝑋𝑌 𝐹 0 0 −𝐾𝑖 ′ 𝑑𝑃
[ 𝑑𝑖𝑓 ]
𝐴 −𝐼𝑟 −𝛽
∆′′′ = | 𝐿𝑖 𝐿𝑌 0 | = 𝐴(−𝛽𝐿𝑖 ) + 𝐼𝑟 (−𝛽𝐿𝑌 ) − 𝛽(−𝐿𝑌 𝐾𝑖 ′ − 𝐿𝑖 𝐸𝑀′ 𝑌)
′
𝐸𝑀 𝑌 −𝐾𝑖 ′ −𝛽
= −𝛽(𝐴𝐿𝑖 + 𝐼𝑟 𝐿𝑌 − 𝐿𝑌 𝐾𝑖 ′ − 𝐿𝑖 𝐸𝑀′ 𝑌)
= −𝛽(𝐿𝑖 (1 − 𝐶𝑌 𝑑 + 𝐸𝑀′ 𝑌) + 𝐼𝑟 𝐿𝑌 − 𝐿𝑌 𝐾𝑖 ′ − 𝐿𝑖 𝐸𝑀′ 𝑌)
∆′′′ = −𝛽(𝐿𝑖 (1 − 𝐶𝑌 𝑑 ) + 𝐼𝑟 𝐿𝑌 − 𝐿𝑌 𝐾𝑖 ′ ) > 0
1 −𝐼𝑟 −𝛽
|0 𝐿𝑌 0 |
𝑑𝑌 0 −𝐾𝑖 ′ −𝛽 −𝛽𝐿𝑖
= ′′′
= ′′′ > 0
𝑑𝐺 ∆ ∆
0 −𝐼𝑟 −𝛽
1
|− 𝐿𝑌 0 |
𝑃
𝑑𝑌 0 −𝐾𝑖 ′ −𝛽 −𝛽𝐼𝑟
= ′′′
= >0
𝑑𝐷 ∆ 𝑃∆′′′
We can further move on with our analysis of perfect and imperfect capital mobility among
economies both under fixed and flexible exchange rate systems.