| Two Country (Home-Foreign) ISLM-FX Model
A. Floating Rates (with permanent shocks):
restart;
GOV:= 1900; TR:=0.20;
MS:= 5000; P:=100;
FGOV:=19000; FTR:=0.30;
FMS:=60000; FP:=200;
ADBoth:={
PC =0.80*(Y-TR*Y),
GPI=2400-10000*IR,
CA =300*ER*FP/P+0.02*ER*FY-0.1*Y,
Y = PC+GPI+GOV+CA,
MS/P=0.62*Y/P-200*IR,
IR=FR+FE/ER-1,
FPC =0.80*(FY-FTR*FY),
FGPI=10800-60000*FR,
FCA =-CA/ER,
FY=FPC+FGPI+FGOV+FCA,
FMS/FP=1.24*FY/FP-1200*FR,
ER=FE
};
ADResult:=solve(ADBoth, {Y, ER, FE, IR, PC, GPI, CA, FY, FR,
FPC, FGPI, FCA});
B. Fixed Rates (but only Home Central Bank intervenes):
restart;
GOV:= 1900; TR:=0.20;
P:=100;
FGOV:=19000; FTR:=0.30;
FMS:=60000; FP:=200;
FE:=0.50;
ADBoth:={
PC =0.80*(Y-TR*Y),
GPI=2400-10000*IR,
CA =300*ER*FP/P+0.02*ER*FY-0.1*Y,
Y = PC+GPI+GOV+CA,
MS/P=0.62*Y/P-200*IR,
IR=FR+FE/ER-1,
FPC =0.80*(FY-FTR*FY),
FGPI=10800-60000*FR,
FCA =-CA/ER,
FY=FPC+FGPI+FGOV+FCA,
FMS/FP=1.24*FY/FP-1200*FR,
ER=FE
};
ADResult:=solve(ADBoth, {Y, ER, MS, IR, PC, GPI, CA, FY, FR,
FPC, FGPI, FCA});
Variable Names:
Y - Gross National Disposable Income
PC - personal consumption
GPI - gross private investment
GOV - government consumption and investment purchases
CA - current account balance
TR - tax rate
MS - money supply
P - price level
IR - interest rate
ER - exchange rate
FE - forward exchange rate
FY - foreign Gross National Disposable Income
FPC - foreign personal consumption
FGPI- foreign gross private investment
FGOV- foreign government consumption and investment purchases
FCA - foreign current account balance
FTR - foreign tax rate
FMS - foreign money supply
FP - foreign price level
FR - foreign interest rate
Assignment:
1) In the floating exchange rate case, create a table showing
solutions for the main endogenous variables (Y, IR, ER, CA, FY, FR):
a) solve for the initial equilibrium.
b) increase GOV from 1900 to 2000.
c) increase GOV from 1900 to 2000 and FGOV from 19000 to 20000.
d) resetting GOV and FGOV to initial values, increase MS from 5000
to 5500.
e) increase MS from 5000 to 5500 and FMS from 60000 to 66000.
2) In the fixed exchange rate case, create a table showing
solutions for the main endogenous variables (Y, IR, MS, CA, FY, FR):
a) solve for the initial equilibrium.
b) increase GOV from 1900 to 2000.
c) increase GOV from 1900 to 2000 and FGOV from 19000 to 20000.
d) resetting GOV and FGOV to initial values, increase FE from 0.50 to 0.55.
3) In each of the above cases, explain your results with words
and appropriate graphs (i.e., the ISLM-FX model for the home
country, and the Home-Foreign model I will show you in class), and
explain the directional
and relative change of the main endogenous variables.
4) In which case (floating or fixed) is fiscal policy more effective
for the Home country? In which case (floating or fixed) is fiscal
policy coordination superior to unilateral action for the Home country?
For the Foreign country?
5) Under floating rates, is monetary policy coordination superior
to unilateral action for the Home country? For the Foreign country?
6) How do your results for the Home economy differ substantially
from those from the single-country models used in the prior two Maple assignments?
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