ABSTRACT
In this chapter we examine a model which has had a fundamental influence on international m onetary economics, particularly the branch dealing with floating exchange rates: namely, the M undellFleming (MF) model (see, inter alia, Fleming, 1962; Mundell, 1963, 1968; and Sohmen, 1967). The basic focal point of the MF model is a small open economy with unemployed resources, a perfectly elastic aggregate supply curve, static exchange rate expectations and perfect capital mobility. Given such assumptions it can be dem onstrated that with flexible exchange rates monetary policy is extremely powerful in altering real output and fiscal policy is completely impotent. The inefficacy of fiscal policy under floating exchange rates has been one of the most widely accepted conclusions in international economics. However, this conclusion is crucially dependent on the underlying assumptions of the MF model; relaxing such assumptions results in both fiscal and monetary policy having an effect on output. In this chapter the basic MF model is analysed, its properties outlined, and some of its underlying assumptions questioned.
