Edited by Mark Blaug and Peter Lloyd
48. The Fleming-Mundell diagram Russell Boyer and Warren Young MUNDELL-FLEMING AND MUNDELL’S DIAGRAMS The open economy IS-LM-BP curve diagram has been one of the most widely used in macroeconomic textbooks. Although other diagrammatic representations of the open economy have been developed, such as the Salter-Swan-Corden-Meade dependent economy approach, IS-LM-BP has proved its value through its standard form, simplicity and versatility, since it first appeared in Mundell (1963) (where these curves are denoted by XX-LL-FF, notation that we utilize here). Although the diagram is usually cited as a key element in the ‘Mundell-Fleming model’, perhaps a better description of the construct is Mundell’s diagrammatic representation of the ‘Fleming [equational] model’ (Cooper 1976). Indeed, Mundell (1963) provided a diagram which could be said to represent Fleming’s (1962) equations, similar to the case of IS-LM, where Hicks (1937) provided a diagram representing the equations of Harrod and Meade (see Chapter 47, on IS-LM). Mundell’s construct is diagrammatic representation for the specific case of perfect capital mobility. The diagram (see Figure 48.1) contains two panels. The horizontal axis is common to the two panels, and measures real output. The upper panel has the interest rate measured on its vertical axis, and this is the panel that all textbooks which utilize the diagram reproduce in their presentations. The lower panel measures the value of the exchange rate on its vertical axis, but the information provided by it is not clear-cut. One needs the further direction which is supplied by the upper panel before it is...
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