Lecture 11: Mundell-Fleming and Exchange Rate SystemsSlide 2Fixed Exchange Rates (Credible)Slide 4Crises in Fixed Exchange Rate SystemsSlide 6Expected EventsLecture 11: Mundell-Fleming and Exchange Rate Systems •Mundell-Fleming•Fixed exchange rates–Policy–Crises•ExpectationsiYEISLMInterest parity Mundell-Fleming* Fiscal and Monetary policyE = E 1+i-i*e------IS : Y = C(Y-T) + I(Y,i) + G + NX(Y,Y*, E / (1+i-i*))Fixed Exchange Rates (Credible)- A little bit of it even in “flexible” exchange rates systems; “commitment” to E rather than M=> i = i* => M = YL(i*) P- Central Bank gives up monetary policyiYEISLMInterest parity- Fiscal and Monetary policy- Capital controls; imperfect capital flowsi*Crises in Fixed Exchange Rate Systems(a) Interbank Interest Rates0%5%10%15%20%25%30%35%40%45%50%Jan-97Feb-97Mar-97Apr-97May-97Jun-97Jul-97Aug-97Sep-97Oct-97Nov-97Dec-97Jan-98Feb-98Mar-98Apr-98May-98Jun-98Jul-98Aug-98Sep-98Oct-98Nov-98Dec-98Jan-99Feb-99Mar-99Apr-99May-99Argentina Brazil Mexicoi = i* + (E(t+1) - E) / Ee* ERM crisis: Sweden (500%)iYEISLMi*Note: There is a shift in the IS as well… but this is small, especially in the short runExpected Events- Back to flexible exchange rates; expected M expansioni0
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