The Mundell-Fleming Model: A Dirty Float Version
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 userfriendly 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.
Descripción
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