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Analysis of EMU Economics: Fixed vs. Flexible Exchange Rates with Fiscal Policy

Explore the impact of fixed and flexible exchange rates on EMU economics with fiscal policies under varying capital mobilities.

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Analysis of EMU Economics: Fixed vs. Flexible Exchange Rates with Fiscal Policy

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  1. ISLMBP Applications to EMU Economics

  2. ISLMBP Applications to EMU Economics • 1) Fixed Exchange Rates, Fiscal Policy, Low Capital Mobility • 2) Fixed Exchange Rates, Fiscal Policy, High Capital Mobility • 3) Fixed Exchange Rates, Monetary Policy, Low Capital Mobility • 4) Fixed Exchange Rates, Monetary Policy, High Capital Mobility

  3. ISLMBP Applications to EMU Economics • 5) Flexible Exchange Rates, Fiscal Policy, Low Capital Mobility • 6) Flexible Exchange Rates, Fiscal Policy, High Capital Mobility • 7) Flexible Exchange Rates, Monetary Policy, High Capital Mobility

  4. BP 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility LM1 a r1 IS1 O Y Y1

  5. BP IS2 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility r LM1 a r1 IS1 O Y1 Y An expansionary fiscal policy:

  6. Y2 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility r BP LM1 b r2 a r1 IS2 IS1 O Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  7. 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility r BP LM1 b r2 a r1 IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy: BP curve steeper than LM curve

  8. LM2 c r3 Restoration of full equilibrium Y3 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility r BP LM1 b r2 a r1 IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy:

  9. LM a r1 IS Y1 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility BP Y O

  10. LM1 b BP r2 a r1 IS2 IS1 Y2 Y1 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility O Y An expansionary fiscal policy

  11. 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility LM1 r BP b r2 a r1 IS2 IS1 O Y Y1 Y2

  12. LM2 c r3 Restoration of full equilibrium Y3 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility LM1 r BP b r2 a r1 IS2 IS1 Y O Y2 Y1

  13. 3. Fixed exchange rates, Monetary Policy, High Capital Mobility r LM1 BP a r1 IS O Y1 Y An expansionary monetary policy

  14. b r2 Y2 3. Fixed exchange rates, Monetary Policy, High Capital Mobility r LM1 LM2 BP a r1 IS O Y1 Y An expansionary monetary policy

  15. 3. Fixed exchange rates, Monetary Policy, High Capital Mobility r LM1 LM2 BP a r1 b r2 IS O Y1 Y2 Y An expansionary monetary policy

  16. Full equilibrium is restored back at point a ISLMBP analysis: fixed exchange rates r LM1 LM2 BP a r1 b r2 IS O Y1 Y2 Y An expansionary monetary policy

  17. THE OPEN ECONOMY AND ISLM ANALYSIS • Analysis under free-floating rates • effects of exchange rate changes on the BP curve

  18. Appreciation BP Movements in the BP curve r SURPLUS O Y

  19. Depreciation Movements in the BP curve r BP DEFICIT O Y

  20. LM b r2 a r1 IS2 IS1 Y2 Y1 ISLMBP analysis: floating exchange rates r BP O Y An expansionary fiscal policy

  21. ISLMBP analysis: floating exchange rates r LM b BP r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy

  22. ISLMBP analysis: floating exchange rates r LM b BP r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy

  23. BP2 c r3 Full equilibrium is restored at point c IS3 Y3 ISLMBP analysis: floating exchange rates r LM b BP1 r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy

  24. BP1 b r2 IS2 Y2 ISLMBP analysis: floating exchange rates r LM a r1 IS1 O Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  25. ISLMBP analysis: floating exchange rates r BP1 LM b r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  26. ISLMBP analysis: floating exchange rates r BP1 LM b r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  27. BP2 c r3 Full equilibrium is achieved at point c IS3 Y3 ISLMBP analysis: floating exchange rates r BP1 LM b r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  28. LM2 r2 b Y2 ISLMBP analysis: floating exchange rates r LM1 BP1 a r1 IS1 O Y1 Y An expansionary monetary policy

  29. ISLMBP analysis: floating exchange rates r LM1 LM2 BP1 a r1 The balance of payments deficit causes the BP line to shift downward r2 b IS1 O Y2 Y1 Y An expansionary monetary policy

  30. The depreciation causes the IS curve to shift to the right ISLMBP analysis: floating exchange rates r LM1 LM2 BP1 a r1 r2 b IS1 O Y2 Y1 Y An expansionary monetary policy

  31. BP2 c r3 Full equilibrium is restored at point c IS2 Y3 ISLMBP analysis: floating exchange rates r LM1 LM2 BP1 a r1 r2 b IS1 O Y2 Y1 Y An expansionary monetary policy

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