Revision Of The Mundell-Fleming Model

Macroeconomic model in open-economy has always been an important research field of macroeconomics. In 1963, Robert·A.Mundell and Marcus Fleming introduced foreign trade and capital flows into the closed economy IS-LM model, and established a macroeconomic model in open economy, which is called the Mundell-Fleming model. The main contribution of the model is its systematic analysis on the influence on effectiveness of macroeconomic policies due to international capital flows considered alternative exchange rate regimes. Since then, this model has been extended in various aspects and looked upon as the main"workhorse"of open-economy macroeconomics.The meaning of studying Mundell-Fleming model lies in not only its clear economic implications, but its providing a method to analysis the impact of macroeconomic policies under the conditions of open economy more effectively. It is a great issue in Chinese economic development to find out how to apply the Mundell-Fleming model better to Chinese macro-economy. In this paper, the traditional Mundell-Fleming model is revised, and used to analyze the practical situation in China. This dissertation mainly includes:Firstly, it commentates the core concept, historical significance and defects of Mundell-Fleming model, and reviews the research results of domestic and foreign scholars on it. Secondly, it analyzes the mechanism that economic growth of China impressed on the RMB exchange rate, and uses Market-skimming pricing and fund-waiting model to analyze and test Dynamic Theory of Purchasing Power Parity, based on the conclusion proved by WU Jun and other scholars. Thirdly, the algebraic expressions of Mundell-Fleming model is revised and tested. Fourthly, the revised Mundell-Fleming model is used to analyze different exchange rate systems affect economic entity of China when facing various shocks in an open economy. Fifthly, it analyzes the effects after the Chinese government has taken "stable financial policy and tight monetary policy" from 2007 to 2008, and points out that China are mainly cost-push inflation. The Chinese government should take the current "From a tight financial policy and tight monetary policy"; or take the "moderately tight monetary policy", meanwhile speed up the pace of RMB appreciation, in order to slash foreign trade surplus of China.