IS-LM-BP model: It can be used to analyze the macroeconomic equilibrium under the conditions of open economy and different exchange rate systems.
Yes: the commodity market
LM: money market
BP: foreign exchange market (changed to balance of payments)
Case 1: Capital flows completely (BP is vertical, and BP is only affected by KA account (capital and financial account))
(1) fixed exchange rate system
(1) the effect of monetary policy (invalid)
If capital can fully flow, domestic and foreign assets can be fully replaced. Under the fixed system, the interest rates at home and abroad are equal. Otherwise, any interest rate difference will make capital flow until the spread is zero.
Let the domestic interest rate be I and the foreign interest rate be I *；; Domestic income y, foreign income y*
IS is the combination of I and y when the commodity market is balanced;
LM is the combination of I and y when the money market is balanced;
BP is the combination of I and Y in the balance of payments. Because the assets can be completely replaced and the interest rates at home and abroad are equal, BP is a horizontal line.
It is speculated that the central bank will increase the money supply and stimulate the economy. Short-term changes in the money supply will affect the money market. In the short term, the LM curve shifts to the right by LM', and the economic equilibrium point E to E '；; Although the commodity market and the foreign exchange market are balanced at this time, the domestic interest rate I
This shows that under the condition of fixed exchange rate and complete capital flow, the independence of a country's monetary policy is completely lost and the monetary policy is invalid. The "ternary problem" is a phenomenon that exchange rate stability, free capital flow and monetary policy independence cannot be realized at the same time.
② Effect of fiscal policy (effective)
The government adopts an expansionary fiscal policy, and the expenditure increases, which directly affects the real economy. First, it affects the commodity market. The IS curve moves to IS', and the equilibrium point E moves to E'.
In the short term, the interest rate I rises, and y0 moves to the right to y 1. Although the increase in income leads to an increase in imports, due to the infinite interest rate elasticity, the increase in interest rates leads to a large inflow of capital, resulting in a surplus in the balance of payments, and the local currency is under pressure to appreciate. In order to maintain a fixed exchange rate, the central bank sells local currency and buys foreign exchange. In the long run, the LM curve moves right to LM', the equilibrium points E' to E ",and y 1 moves right to y2 (further increasing).
Under the condition of fixed exchange rate and sufficient capital flow, fiscal policy is effective, and the increase of income is greater than that of closed economy.
(2) floating exchange rate system
Case 3: The funds are not flowing at all (at the BP level, BP IS only affected by the CA account, and when the CA account changes, BP and IS will change together).
(1) fixed exchange rate system
(2) floating exchange rate system:
Case 5: Incomplete capital flow (BP is affected by CA account (current account) and KA account (capital and financial account * * *))
1, which is more influenced by KA account, BP curve is more horizontal, inclined to the right, and the slope is smaller than LM.
(1) Under the fixed exchange rate system:
(2) floating exchange rate system
2. Affected by CA account, BP curve is more vertical and inclined to the right, and the slope is greater than LM.
(1) Under the fixed exchange rate system:
(2) floating exchange rate system:
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