Академический Документы
Профессиональный Документы
Культура Документы
Ben J. Heijdra
University of Groningen
April 2004
1 Introduction
In this note we study the two-country model of Table 11.4 in more detail. The model is
restated here for convenience.
Table 11.4. A two-country extended Mundell-Fleming model
y = −²Y R r∗ + ²Y Q q + ²Y G [g + ηg ∗ ] , (T3.1)
y∗ = −²Y R r∗ − ²Y Q q + ²Y G [g ∗ + ηg] , (T3.2)
m − p = ²MY y − ²MR r∗ , (T3.3)
∗ ∗ ∗ ∗
m − p = ²MY y − ²MR r , (T3.4)
y = −ω N ²NW [w − p] , (T3.5)
y∗ = −ω N ²NW [w∗ − p∗ ] , (T3.6)
w = w0 + λpC , (T3.7)
w∗ = w0∗ + λ∗ p∗C , (T3.8)
pC = ω 0 + p + (1 − α)q, (T3.9)
p∗C ∗
= ω 0 + p − (1 − α)q, (T3.10)
Notes: All variables except the interest rate are in logarithms and starred variables refer to the foreign
country. Endogenous variables are the outputs (y, y ∗ ), the real exchange rate (q), the rate of interest
(r∗ ), price levels (p, p∗ ), nominal wages (w, w∗ ), and consumer price indexes (pC , p∗C ). Exogenous are
government spending (g, g∗ ), the money stocks (m, m∗ ), and the wage targets (w0 , w0∗ ). Note that
ω 0 ≡ log Ω0 .
We compute the effects of fiscal and monetary policy under the various regimes.
1
2
y = −²Y R r∗ + ²Y Q q + ²Y G [g + ηg ∗ ] , (1)
y ∗ = −²Y R r∗ − ²Y Q q + ²Y G [g ∗ + ηg] , (2)
m − w0 = δ N y − ²MR r∗ , (3)
m∗ − w0∗ = δ N y ∗ − ²MR r∗ , (4)
y = ω N ²NW [p − w0 ] , (5)
∗ ∗
y = ω N ²NW [p − w0∗ ] , (6)
where we have already used (5)-(6) to simplify (3)-(4) and where the composite parameter
δ N is defined as follows:
1 + ²MY ωN ²NW
δN ≡ . (7)
ω N ²NW
and:
²Y G η²Y G 0 0
η²Y G ²Y G 0 0
ΓN ≡
.
(10)
0 0 1 0
0 0 0 1
1
∆−1
N ≡ × (12)
|∆N |
δ N ²Y Q ²M R δ N ²Y Q ²MR ²Y Q [²MR + 2δ N ²Y R ] −²Y Q ²MR
δ N ²Y Q ²M R δ N ²Y Q ²MR −²Y Q ²MR ²Y Q [²MR + 2δ N ²Y R ]
.
δ2N ²Y Q δ 2N ²Y Q −δN ²Y Q −δN ²Y Q
−δ N [²MR + δ N ²Y R ] δ N [²MR + δ N ²Y R ] ²MR + δ N ²Y R − [²MR + δ N ²Y R ]
Apart from the effect on the real exchange rate (which changes sign), all effects in (14) and
(15) coincide.
4
y = −²Y R r∗ + ²Y Q q + ²Y G [g + ηg ∗ ] , (20)
y ∗ = −²Y R r∗ − ²Y Q q + ²Y G [g∗ + ηg] , (21)
y = −ω N ²N W [ω 0 + w0 + (1 − α)q] , (22)
∗
y = −ω N ²N W [ω 0 + w0∗ − (1 − α)q] , (23)
∗
p = m − ²MY y + ²MR r , (24)
p∗ = m∗ − ²MY y∗ + ²MR r∗ , (25)
where (20)-(23) determine the real quantities (y, y ∗ , r∗ , and q) and (24)-(25) residually
determine the nominal quantities. (The model features a Classical dichotomy.) In matrix
format the real system can be written as:
y " #
∗
y g
∆R
r∗ = ΓR g∗ , (26)
q
where ∆R and ΓR are now given by:
1 0 ²Y R −²Y Q
0 1 ²Y R ²Y Q
∆R ≡
1 0 0
,
(27)
δR
0 1 0 −δ R
and:
²Y G η²Y G
η²Y G ²Y G
ΓR ≡
.
(28)
0 0
0 0
The composite parameter δ R is defined as:
δ R ≡ (1 − α) ω N ²NW . (29)
4 Mixed case
In the mixed case we have λ = 1 and λ∗ = 0. The model can be written as:
and:
²Y G η²Y G 0
η²Y G ²Y G 0
ΓM ≡
,
(42)
0 0 0
0 0 1
δ R (²MR + δ N ²Y R ) −δ N δ R ²Y R ²Y Q (²MR + 2δ N ²Y R ) δ R ²Y R
1 ²Y Q ²MR (δ R + ²Y Q ) ²MR −²Y Q ²MR ²Y R (δ R + 2²Y Q )
∆−1
M ≡
|∆M | ²Y Q δ N (δ R + ²Y Q ) δ N −δ N ²Y Q − (δ R + ²Y Q )
− (²MR + δ N ²Y R ) δ N ²Y R ²MR + δ N ²Y R −²Y R
(44)
8
y 1
y∗ η
= ∆−1 ²Y G g
r∗ M
0
q 0
δR [²MR + (1 − η) δ N ²Y R ]
²MR [(1 + η) ²Y Q + ηδ R ] ²Y G g
=
|∆M | . (45)
δN [(1 + η) ²Y Q + ηδR ]
− [²MR + (1 − η) δ N ²Y R ]
y η
y∗ 1
= ∆
−1 ²Y G g ∗
r∗ M
0
q 0
δR [η²MR − (1 − η) δ N ²Y R ]
²MR [(1 + η) ²Y Q + δ R ] ²Y G g∗
=
|∆M | . (46)
δN [(1 + η) ²Y Q + δ R ]
−²MR + (1 − η) δ N ²Y R
Domestic monetary policy does not affect any of the real variables. It is left as an exercise to
the reader to see how it affects the nominal price level and the nominal exchange rate.
9
y = g + ζg∗ (48)
y∗ = g∗ + ζ ∗g (49)
Implicitly we hold constant m, m∗ , w0 , w0∗ , and ω0 and normalize them to zero. We can then
represent the various regimes in terms of ζ and ζ ∗ .
(1 + η) ²MR ²Y G
y = [g + g ∗ ] , (50)
2 [²MR + δ N ²Y R ]
(1 + η) ²MR ²Y G
y∗ = [g + g ∗ ] . (51)
2 [²MR + δ N ²Y R ]
Normalizing the common multiplier by unity, we can represent this case by ζ = ζ ∗ = 1.
(1 − η) δR ²Y G
y = [g − g ∗ ] , (52)
2 (δR + ²Y Q )
(1 − η) δ R ²Y G
y∗ = [−g + g ∗ ] . (53)
2 (δ R + ²Y Q )
Normalizing the common multiplier by unity, we can represent this case by ζ = ζ ∗ = −1.
δ R ²MR ²Y G
= 1. (56)
|∆M |
11
Using (56)-(58) we can then write (54)-(55) in the form of (48)-(49), though with ḡ and ḡ ∗
appearing, where ζ and ζ ∗ are defined as follows:
(1−η)δ N ²Y R
η− ²MR
ζ = (1+η)²Y Q
< 0, (59)
1+ δR
(1+η)²Y Q
δR +η
0 < ζ∗ = < 1. (60)
1 + (1−η)δ²MR
N ²Y R
Note that in the text we ignore this transformation and work directly with (59)-(60).