Fluctuation, Inflation, and Stabilization in an Open Economy

This chapter presents economic fluctuation and stabilization models in a small open economy. The first section addresses the Mundell-Fleming-Dornbusch model under a fixed exchange rate regime. The second section adds the balance-of-payments equation to this model since wealth is an argument in the consumption function. The third section introduces the fixed exchange rate regime in a new Keynesian model. The fourth section deals with the Mundell-Fleming-Dornbusch model under a flexible exchange rate regime. The fifth section analyzes the extended Mundell-Fleming-Dornbusch model for a flexible exchange rate. The sixth section presents the flexible exchange rate for the new Keynesian model.