Mundell-Fleming Model
An economic model called the Mundell-Fleming Model focuses on how monetary policy and currency rates affect the economy and understanding international finance. The IS-LM model is extended by it.
In the early 1960s, many restrictions were placed on international transactions. Most currencies were fixed, and there were extensive controls on capital movements. It was the time when the Bretton Woods system was in place.
Robert Mundell, a member of the IMF Research Department, and J. Marcus Fleming, a British economist, developed the original Mundell-Fleming Model. Initially, they posited the world of perfect capital mobility. However, they recognized the limitations of such a model.
In their 1962 paper, Fleming and Mundell discussed how monetary and fiscal policies affect interest rates. They assumed that if a country’s interest rate is higher than its foreign counterpart, there is an excess supply of funds available.
According to the Mundell-Fleming Model, this excess supply of funds is due to the inflow of money from the domestic economy to the foreign one. As the influx of funds increases, the domestic interest rate drops lower than the foreign interest rate.
International Fisher Effect
The International Fisher Effect is a theory that Irving Fisher developed. It is a method of predicting the future spot exchange rate. Currency traders use it to gain insight into the prices of their currency.
The International Fisher Effect is based on a mathematical equation. In short, it uses the difference in nominal interest rates to predict the exchange rate of two nations.
According to the International Fisher Effect, the difference between the nominal interest rates of two countries is directly proportional to the change in the exchange rate. Assuming that money supply and inflation rates are constant, this equation suggests that a higher inflation rate will result in a depreciating currency.
One thing to remember when considering the International Fisher Effect is that the corresponding real interest rate is not necessarily constant. A change in a country’s monetary policy will likely increase the nominal interest rate, which will, in turn, increase the inflation rate.
Global financial governance
The G20 Eminent Persons Group (EPG) was created a year ago to focus on global financial governance. They recently published their interim report and are now working on their recommendations. Their suggestions should be considered as alternatives to the current state of affairs.
International financial markets have become crucial for a variety of reasons. As financial technology advances, economies are becoming more interconnected. However, there are also enormous economic costs associated with these markets.
Financial markets are subject to periodic crises. Various national governments have intervened in multiple ways. These interventions have produced a range of results. While these efforts have contributed to financial stability, more is needed to create an overall effect. There has been a need for global regulatory consistency.
The G20 Eminent Persons Group has proposed that global financial governance should involve a range of measures. These measures should include an economic, regulatory infrastructure, regulatory bans, and disclosure laws.
