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Post by Guest on May 11, 2016 11:26:56 GMT
(c) When there is a flexible exchange rate regime, identify the 4 endogenous variables in original set of 4 equations. What are the 4 endogenous variables if a fixed exchange rate regime is adopted?
ANSWER: Flexible: Y,Md,i,e Fixed: Y,Md,i,Ms. The central bank endoge- nously chooses Ms to maintain the exchange rate peg.
Why is Ms not endogenous in flexible?
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Post by guest on May 11, 2016 11:44:31 GMT
I think it's because Ms shifts as a response of a fiscal contraction/expansion so that the interest rate doesn't change (so that the exchange rate doesn't change). This is called monetary accommodation.
In other words, Ms is not predetermined outside the model so that is why it is endogenous.
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gm
New Member
Posts: 19
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Post by gm on May 11, 2016 13:05:31 GMT
The comment above explains why Ms is endogenous under a fixed regime.
The reason that Ms is not endogenous for flexible is because endogenous variables are determined INSIDE the model - that is our definition!
Under a flexible ex rate regime, the CB exogenously chooses the Ms to achieve it's goals - it is not determined or affected my other variables.
Hope this helps!
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Post by Oliver on May 11, 2016 22:51:37 GMT
Hi,
Yes, the answer above is correct.
In our basic IS-LM model, Ms was ***by assumption*** exogenous. This is the same in our flexible exchange rate IS-LM model.
We could write down a rule, describing how the central bank should set Ms as a function of some variables (output let's say) - then Ms would be endogenous. But, everything we've done with the basic IS-LM model in this module is to ***assume*** that Ms is exogenous.
Best
Oliver
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