Summary Of International Economics By Robert Mundell

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Robert Mundell was awarded the 1999 Nobel Prize in economics field “for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas.” He was more aware than the American macroeconomists of the importance of international trade and international capital flows. Mundell always consider how governments should stabilize economics by keeping them growing without involving high inflation in a world of trade and capital flows.
In his book International Economics (1968), Robert Mundell has developed his analysis of the two types of stabilization which are monetary policy and fiscal policy in open economies. In the Mundell-Fleming Model, Mundell has introduced foreign trade and capitals …show more content…

Mundell formulated dynamic models to describe how prolonged imbalances could arise and be eliminated. He showed how, with fixed interest rates, an economy will adjust as balance-of-payments surpluses or deficits cause changes in the money supply. For example, when the capital movements are slowly and the exchange rates are fixed, an expansive monetary policy will reduce the interest rate and cause increment in domestic spending. The subsequent balance of payments deficit will generate monetary outflows, which in turn lower demand until the balance of payments towards to equilibrium. The net long-term result is a higher price level and no real economic …show more content…

There are advantages to large currency areas, including reduced transactions costs, and the reduced vulnerability of countries to real exchange rate shocks (e.g., those caused by speculative bubbles or protectionism). There are also disadvantages, principally foregoing counter-cyclic regional monetary policy. He finds the optimum currency areas will make the difficulty of maintaining full employment when one of the all countries in optimum currency areas suffers from one event. In addition, he also mentioned higher labor mobility is able to offset the asymmetric shocks and has easier time to find

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