Política fiscal expansiva, Mundell - Fleming. T. C. Fijo | Cap. 21 - Macroeconomía

New Section

In this chapter, we will study an expansionary fiscal policy in the Mundell-Fleming model, with a fixed exchange rate and imperfect capital mobility. We start from the internal and external equilibrium in the Mundell-Fleming model.

Expansionary Fiscal Policy

• An expansionary fiscal policy is conducted by increasing public spending.

• The IS curve shifts to the right, leading to a new balance in the money and goods market at point 2.

• However, there is a deficit in the balance of payments due to increased imports.

• The increase in income level causes an increase in imports, resulting in a deficit in the current account.

• On the other hand, the increase in local interest rates encourages investors to bring their capital into the country, leading to a surplus in the capital account.

Balance of Payments

• The balance of payments depends on the sensitivity of consumers and investors to changes in income level and interest rates.

• In this case, the current account deficit weighs more than the capital account surplus due to consumers' higher sensitivity to changes in income level compared to investors' sensitivity to changes in interest rates.

Currency Depreciation

• A deficit in the balance of payments leads to a depreciation of the local currency as more foreign currency is demanded for imports.

• This depreciation causes a fall in exchange rate; however, since we are under a fixed exchange rate scheme, the Central Bank must ensure stability.

• The Central Bank can withdraw money from circulation by selling foreign currency from its international reserves. This decreases money supply and aims to revalue the currency and prevent further depreciation.

Conclusion

The expansionary fiscal policy with a fixed exchange rate and imperfect capital mobility has implications on both internal and external balances. It leads to changes in trade flows, capital movements, and currency values.