Macroeconomic Policy in the Open Economy

Abstract

In the theory presented so far, minimal attention has been given to the impact of macroeconomic policy in open economies. The best-known macroeconomic model for examining the operation of fiscal and monetary policy in an open economy is that proposed by Fleming (1962) and Mundell (1963). The Mundell-Fleming (MF) model is an open economy extension of the textbook Keynesian framework and links international financial capital flows, interest differentials, exchange rates, competitiveness, exports, imports and national income. The popularity of MF analysis stems from its conclusions about the effectiveness of monetary and fiscal policy in stabilising national income under alternative exchange rate regimes.