Understanding Macroeconomic Equilibrium in Open Economies Through Demand-Side Analysis
Explore the concept of macroeconomic equilibrium in open economies using a demand-side approach, focusing on IS, BP, and MP curves. Learn how shocks impact equilibrium and exchange rates.
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Presentation Transcript
Macroeconomic Equilibrium in open economies A demand side approach
IS CURVE i i Y Different slopes i Y Y IS curve Different intercepts 000 11 0 1 1 Y IG c c t m = + + + + + + b i ( ) w x Y x m E Ab i E = + ( ) Y
BP CURVE i 0< < i = Surplus Y Different slopes i Deficit Y Y Different intercepts BP Curve x m = + + + e * 0 0 i E Y Y i E = + = 0 BP NX MC RU W = + = 0 BP NX MC = = + e * * i i i i E ( ) + + + i i = e ( * ) 0 x Y x m E m Y E 0 1 1 0 w MC NX
MP CURVE Floating exchange rates i i MP Y Different slopes i Y Y Different intercepts MP Curve = + + i Y P E = + i Y P
MP CURVE Fixed exchange rates or currency union i MP=BP 0< < = Y MP Curve * i x E m = + + + e * 0 0 i E Y Y i E 0 W = + e i = * i i
Macroeconomic equilibrium Floating exchange rates i i IS BP IS BP MP MP S1 S1 i i S2 S2 Y Y Y Ab i E = + ( ) Y Ab i E = + ( ) = + + i Y P E = + + i Y P E x m = + e * i i E = + + + e * 0 0 i E Y Y i E W
Autonomous demand shock i IS IS BP MP Y A i E i Y E i IS change via exports MP reaction BP equilibrium 0 0 0 0 Y i Y Y Y A M Y MP accomodates No change in E 0 0 and 0 MC i MP IS IS BP MP i i Y Y Y
Monetary policy shock i MP IS BP IS MP i i i Y i E i NX E Y Y Y BP equilibrium IS Equilibrium 0 0 i IS IS MP MP i i BP Y Y Y
Macroeconomic equilibrium Fixed exchange rates i i IS BP=MP IS S1 S1 BP=MP i i S2 S2 Y Y = A bi + + = A bi + + ( x Y ) Y E ( x Y ) Y E 0 0 w 0 0 w x m = + + + e * 0 0 i E Y Y i E = + e * i i E 0 W 0
Autonomous demand shock i IS IS BP=MP Y A i Y i i i on BP equilibrium partial crowding out 0 0 0 Y Y Y i IS IS BP=MP Y A i = on BP equilibrium 0 0 Y i* Y Y
Shock on External equilibrium i MP BP=MP MP IS i Y i on IS equilibrium 0 0 i i i e E Y Y Y i IS i Y i on IS equilibrium 0 0 MP BP=MP MP i i i * i Y Y Y
