Under the Mundell model, why monetary policy is ineffective in the context of a fully popular capita

When capital is fully flowing, the domestic currency and the foreign currency are essentially complete substitutes, i.e. the demand for them depends only on the relative returns of the two.

And then again, at a fixed exchange rate, the domestic interest rate is effectively equal to the world interest rate.

For example, if a country adopts complete capital flow and fixed exchange rate, then when the expansionary monetary policy is implemented, the domestic money supply increases, the interest rate decreases, the yield of the national currency decreases relative to foreign currencies, a large amount of capital outflows, and the national currency generates depreciation pressure.

Therefore, in the case of full capital flow, in order to maintain a fixed exchange rate. Only at the expense of monetary policy.

The impossible trinity is a principle in international economics, also known as the "trilemma", also known as the "trilemma", which refers to the fact that it is impossible for a country to accomplish all three of the following at the same time

Free flow of capital in and out (capital).

Fixed exchange rate

Independent monetary policy (monetary policy) and monetary policy is used to control interest rates, so in a country or region where capital flows freely, it is impossible to control the double rate.

Answer]: False. According to the Mundell-Fleming model, under a fixed exchange rate system, fiscal policy is relatively effective and monetary policy is relatively ineffective.

Answer]: The key assumption in the Mundell-Fleming model is that capital flows completely, and in the case of complete capital flows, the level of domestic interest rates will always be consistent with the level of international interest rates. If the bank tries to reduce the money supply, it puts upward pressure on the exchange rate, and in order to maintain a fixed exchange rate, Zheng Hong's chaotic money supply and the LM curve must return to their original position, and nominal monetary policy is ineffective.

It's not that the monetary function has changed, but it can be understood from any of the following models.

The exchange rates here are all indirectly denominated by default, i.e. the foreign currency of the local currency**)1 is analyzed from the Mundell-Fleming model.

Fiscal policy IS* shifted to the right, and the equilibrium exchange rate rose, i.e., the foreign currency** of the local currency rose above the officially established exchange rate. The increase in the foreign currency of the local currency means that the local currency of the foreign currency ** falls, so there will be some arbitrageurs in the market who rush to exchange the foreign currency in their hands for the official currency. As a result, the local currency supply increases, i.e., LM* shifts to the right.

Arbitrage does not end until the equilibrium exchange rate and the official exchange rate are equal.

2 Analysis was performed using the IS-LM model only.

Fiscal policy has shifted IS to the right and interest rates have shifted upward. Foreign capital inflows, the equilibrium exchange rate rises, as mentioned above, due to the official commitment to exchange a certain exchange rate, arbitrageurs exchange their foreign currencies for local currency, so the supply of the local currency increases, and the LM shifts to the right until the interest rate is equal to the previous interest rate.

In addition, when the exchange rate is fixed, monetary policy is ineffective, but it does not involve IS movement. For example, now that we have decided to increase the money supply, which makes the interest rate have a downward trend, capital wants to flee from the country, so that the equilibrium exchange rate falls, that is, the foreign currency of the local currency will fall, and the arbitrageurs will definitely hurriedly change the local currency in their hands from the official channel to more foreign currency. As a result, the supply of the local currency is reduced.

The expansionary fiscal policy has increased residents' incomes and increased the amount of money.

At the outset, you and I must understand the three vertices of the Mundell Triangle:

1. The independence of monetary policy: the starting point of monetary policy is to regulate the domestic economy, and the independence of monetary policy refers to the process of the country's monetary policy can play a role without being disturbed by foreign resources, and its own events can be done independently, and others do not want to be involved.

2. Free activity of resources: Free activity of resources means that institutions or individuals in the country can remit investment funds to or out of the country without the permission of the domestic authorities, and can be freely exchanged between local currency and foreign currency at the official exchange rate. (Since 1994, the Chinese authorities have allowed the free convertibility of the renminbi with foreign currencies in the import and export of goods and services, but the renminbi has not yet been fully convertible).

3. Stable exchange rate: Even if a firm exchange rate system is implemented, the exchange rate will remain stable within the allowable bumps, and the central bank will intervene beyond the range. A stable exchange rate system has a positive effect on the growth of the country's imports and exports.

There are two forward indicators of <> monetary policy: interest rates and money supply. Since the amount of money provided has an impact on the breeding of interest rates, only interest rates are described here.

Mondale is not probably triangular:

In this triangle, it is only possible to deal with complete monetary policy independence, free movement of resources, and a firm exchange rate.