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MENTAL MODEL · M3924

Mundell-Fleming Model

Mundell-Fleming Model
BusinessHigh supportMacroeconomics
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

An extension of the IS-LM model that incorporates international trade and capital flows, revealing the 'impossible trinity' in an open economy: a country cannot simultaneously achieve (1) fixed exchange rates, (2) independent monetary policy, and (3) free capital movement; it can only choose two of the three. This is the 'iron law' of international finance.

SCAFFOLDING EFFECT

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A policy trade-off framework. It explains why countries must make painful choices among 'exchange rate stability', 'monetary policy autonomy', and 'capital openness'. China chooses (1) and (2), the United States chooses (2) and (3), and the Eurozone chooses (1) and (3), each with its own costs.

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An open-economy extension of IS-LM: under capital mobility, the exchange rate regime determines the effectiveness of monetary and fiscal policies. Under fixed exchange rates, fiscal policy is strong and monetary policy is weak; under floating rates, the opposite holds.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Mundell%E2%80%93Fleming_modelZH · Explicit
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