ABSTRACT
The models of the earlier chapters are now extended to the financial sector. In addition to considering the goods market and the current account only, the new models include the financial markets and the full balance of payments (current account plus financial account). The overall equilibrium of the economy is three pronged, involving the goods market, the financial markets, and the balance of payments (or external sector). The mechanics to achieve these three equilibria and the policy implications are elegantly captured by the Mundell-Fleming model. Robert Mundell (Nobel Laureate in Economics, 1999) developed the model with Marcus Fleming in the early 1960s while visiting the IMF.1
