The Mundell–Fleming model and macroeconomic stabilization policies: Rules and institutions

Description

The standard Mundell–Fleming (M-F) model, gives a binary outcome concerning macroeconomic policy effectiveness (Maitra 2017). Thus, fiscal policy is supposed to be more effective with a fixed exchange rate (1, 0). The monetary policy instead , is supposed to be more effective with a flexible exchange (0, 1) (De Gregorio 2001). This was the key foundation for setting the conditions of the eurozone in 1999. Thus, it was necessary to provide an institutional framework for fiscal discipline concerning the fiscal deficit rule at 3% of GDP, and public debt at 60% of GDP.
This paper analyzes the implications for stabilization purposes set in the Mundell–Fleming (M-F) model and its effectiveness in emerging economies. It also widens the scope of the policy mix given alternative exchange rates. The empirical evidence about the economies of Chile (1991-2003) and Colombia (1994-2004), and the eurozone conditions (1999), were considered to address the main argument that as long as country risk is lower due to countercyclical fiscal policy rules, governments have financial resources at a lower international interest rate, no matter the exchange rate regime.