Effects of Economic Policy Under Capital Controls

9 Pages Posted: 5 Apr 2010

See all articles by Melissa M. Appleyard

Melissa M. Appleyard

Portland State University - Management

Esmond Chia

University of Virginia - Darden School of Business

Abstract

This note provides students with a basic understanding of the Mundell-Fleming model, also known as the IS-LM-BP model. The model is useful in understanding the effects of capital controls (typically in a fixed currency exchange rate regime) on a country's macroeconomic variables. It enables the determination of equilibrium income and how this income responds to economic policy and shocks. It merges the foreign exchange market (BP curve), the goods market (IS curve) and the money market (LM curve).

Excerpt

UVA-BP-0439

EFFECTS OF ECONOMIC POLICY UNDER CAPITAL CONTROLS

In trying to understand the effects of capital controls (typically in a fixed currency exchange rate regime) on a country's macroeconomic variables, it is necessary to have a basic understanding of the Mundell-Fleming model, also known as the IS-LM-BP model.

This model enables the determination of equilibrium income and how this income responds to economic policy and shocks. It merges the foreign exchange market (BP curve), the goods market (IS curve) and the money market (LM curve). Overall equilibrium is achieved when these three markets are in equilibrium.

The Mundell “Irreconcilable Trinity”

Nobel laureate Robert Mundell suggested that countries are preoccupied with trying to attain three conflicting objectives:

. . .

Keywords: Mundell-Fleming model, IS-LM-BP, equilibrium, foreign exchange, goods, money market

Suggested Citation

Appleyard, Melissa M. and Chia, Esmond, Effects of Economic Policy Under Capital Controls. Darden Case No. UVA-BP-0439, Available at SSRN: https://ssrn.com/abstract=1583275

Melissa M. Appleyard (Contact Author)

Portland State University - Management ( email )

United States

Esmond Chia

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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