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Keywords = Mundell–Fleming model

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20 pages, 2526 KB  
Article
Small-Country Mundell–Fleming (IS/LM/BP) Model Predictions Under Both Fixed and Flexible Exchange Rates: Evidence from Australia and S. Korea
by Jonathan Edward Leightner
J. Risk Financial Manag. 2024, 17(11), 495; https://doi.org/10.3390/jrfm17110495 - 6 Nov 2024
Cited by 2 | Viewed by 12544
Abstract
The small-country IS/LM/BP (Mundell–Fleming) model predicts that monetary policy is totally ineffective in countries with fixed exchange rates and super-effective in countries with flexible exchange rates. Furthermore, this model predicts that, under fixed exchange rates, fiscal policy is stronger the more mobile capital [...] Read more.
The small-country IS/LM/BP (Mundell–Fleming) model predicts that monetary policy is totally ineffective in countries with fixed exchange rates and super-effective in countries with flexible exchange rates. Furthermore, this model predicts that, under fixed exchange rates, fiscal policy is stronger the more mobile capital is in terms of moving in and out of the country, but it predicts the opposite for countries with flexible exchange rates; fiscal policy is stronger the less mobile capital is. This paper tests these predictions by applying reiterative truncated projected least squares (RTPLS) to quarterly data from Australia and the Republic of Korea when they employed fixed and then flexible exchange rates. RTPLS produces a separate total derivative estimate for each observation, where the differences in these estimates are due to omitted variables. By doing so, RTPLS makes it possible to see how the estimated relationship changes over time. I found that the effectiveness of monetary policy was not zero under fixed exchange rates but that its effectiveness did increase when Australia and S. Korea switched to flexible exchange rates. Under flexible exchange rates, I found that the effectiveness of fiscal policy was statistically higher than zero for both countries, which conflicts with the assumption of perfect capital mobility. Full article
(This article belongs to the Section Financial Markets)
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17 pages, 1259 KB  
Article
How Australia Has Been Affected by US Monetary and Fiscal Policies: 1960 to 2022
by Jonathan Leightner
J. Risk Financial Manag. 2024, 17(3), 96; https://doi.org/10.3390/jrfm17030096 - 23 Feb 2024
Cited by 2 | Viewed by 4405 | Correction
Abstract
This paper uses Reiterative Truncated Projected Least Squares to estimate the effects of US monetary and fiscal policy on Australia using quarterly data between 1960 and 2022. When Australia had a fixed exchange rate (1960–1983), both US fiscal and monetary policies were positively [...] Read more.
This paper uses Reiterative Truncated Projected Least Squares to estimate the effects of US monetary and fiscal policy on Australia using quarterly data between 1960 and 2022. When Australia had a fixed exchange rate (1960–1983), both US fiscal and monetary policies were positively correlated with Australia’s GDP, which fits the predictions of a small-country IS/LM/BP model with relatively immobile capital. When Australia had a flexible exchange rate (1984–2022), US fiscal policy was positively correlated with Australia’s GDP, but US monetary policy was negatively correlated with Australia’s GDP, which fits the predictions of a large-country IS/LM/BP model. Full article
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16 pages, 593 KB  
Article
Foreign Direct Investment and Exports Stimulate Economic Growth? Evidence of Equilibrium Relationship in Peru
by Ciro Eduardo Bazán Navarro and Víctor Josué Álvarez-Quiroz
Economies 2022, 10(10), 234; https://doi.org/10.3390/economies10100234 - 22 Sep 2022
Cited by 9 | Viewed by 17702
Abstract
The purpose of this research is to estimate the dynamic impacts of foreign direct investments (FDI) and exports on economic growth in Peru (1970–2020) using annual series. Starting with the theoretical Mundell–Fleming static model with assumptions, we find that the change in exports [...] Read more.
The purpose of this research is to estimate the dynamic impacts of foreign direct investments (FDI) and exports on economic growth in Peru (1970–2020) using annual series. Starting with the theoretical Mundell–Fleming static model with assumptions, we find that the change in exports does not affect GDP, and the effect of FDI on GDP can be positive or negative depending on the comparison between the slopes of the IS and LM curves. The variables are foreign direct investment net flow (% of GDP), exports of goods and services (% of GDP), and GDP growth rate (%). FDI and exports constitute first-order integrated processes; meanwhile, the GDP growth rate is a stationary process. The Granger causality evidences feedback between GDP and exports and the FDI-led growth hypothesis. Considering the dependent variable GDP growth rate, the autoregressive distributed lag cointegration bound test shows the findings regarding the cointegration consist of positive long-term equilibrium impacts from exports and FDI on GDP. Estimating an error correction model, in the short-term, the FDI explains to GDP and the exports have an insignificant impact on economic growth in Peru. Finally, we conclude that Peru’s economic policy path should continue to attract foreign capital to increase FDI. Full article
(This article belongs to the Special Issue Foreign Direct Investment and Investment Policy)
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