The Open Economy IS/LM Simulation Model: A User Guide

2 Pages Posted: 21 Oct 2008

See all articles by Wei Li

Wei Li

University of Virginia - Darden School of Business; Centre for Economic Policy Research (CEPR)

Abstract

This is a user guide for the computer simulation of the short-run open economy IS/LM model (UVA-BP-0522X). The model is also known as the Mundell-Fleming model. We assume the user is a student who is studying the short-run open economy model in an intermediate level macroeconomics course. The simulation requires Microsoft Excel version 2000 or newer to run.

Excerpt

UVA-BP-0522

Rev. May 7, 2012

The Open Economy IS/LM Simulation Model: A User Guide

This is a user guide for the computer simulation of the short-run open economy IS/LM model (UVA-BP-0522X). The model is also known as the Mundell-Fleming model. The user is assumed to be a student who is studying the short-run open economy model in an intermediate level macroeconomics course. The simulation requires Microsoft Excel version 2000 or newer.

The simulation Excel file contains five worksheets. The first worksheet, “Cover Sheet,” offers a brief description of the model. It also gives instructions on how to enable circular reference in Excel, a feature that is required for automatic calculation of equilibrium under a fixed exchange rate. Users must follow those instructions before using the simulation model. The second and third worksheets house the simulation models for the large open economy and for the small open economy, respectively. Data used to plot the graphs in the second and third worksheets are dynamically generated in the fourth and fifth worksheets, which are password-protected to prevent accidental changes to the model.

The second worksheet, “Large Open Economy Sim,” is an Excel implementation of the model described in the appendix to chapter 12 of Mankiw's Macroeconomics text. Users who wish to dig deeper into the mechanics of the model should read the appendix. The simulation consists of three graphs:

1. The IS/LM graph, in which the real interest rate (r) and real GDP (Y) are determined by the intersection of IS and LM curves

2. Net Capital Outflow (CF) graph, which depicts a downward sloping CF curve with the real interest rate (r) on the vertical axis

. . .

Keywords: open economy, Mundell-Fleming, IS, LM, macroeconomics, interest rate, exchange rate, GDP, capital flows

Suggested Citation

Li, Wei, The Open Economy IS/LM Simulation Model: A User Guide. Darden Case No. UVA-BP-0522. Available at SSRN: https://ssrn.com/abstract=1276571

Wei Li (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
804-243-7691 (Phone)
804-243-7681 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/li.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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