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Hitesh Jhanji, Lovely Professional University Unit-28: Mundell Model

Unit-28: Mundell Model Notes

Contents
Objectives
Introduction
28.1 Fiscal Monetary Policy for Internal and External Balance: The Mundellian Model
28.2 Summary
28.3 Keywords
28.4 Review Questions
28.5 Further Readings

Objectives

After studying this unit, students will be able to:
y Know the objectives of Mundell,
y Know the criticisms of Mundell Model.

Introduction

In the objective of external balance allotment of monetary policy and in the objective of internal balance,
allotment of fiscal policy must be done. But allotment rule works only when monetary and fiscal policy
without any long lag (pashchataa) are continuously and well accommodated, before their impacts
become visual. This is the “Mundell rule” of successful use of monetary and fiscal policy for internal
and external stability, as per which, an instrument must be combined with that target only on which
it has the maximum relative influence. He calls it the Principle of Effective Market Classification.

28.1 Fiscal Monetary Policy for Internal and External Balance: The
Mundellian Model

Mundell has discussed about the relation between two instruments and two targets. Two instruments
are monetary policy expressed through interest rate and fiscal policy expressed through the government
expenditure. The two targets are full employment (internal balance) and balance of payment balance
(external balance). Allotment rule is of monetary policy for the objective of external balance and for
internal balance is doing of fiscal policy. Allotment of these instruments in the targets is shown in
figure 28.1.

Notes Mundell has discussed about the relation between two instruments and two
targets.

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