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International Monetary Fund. Research Dept.
The Mundell-Fleming model of international macroeconomic originated in the early 1960s and has been extended during the ensuing quarter century. This paper develops an exposition that integrates the various facets of the model and incorporates its extensions into a unified analytical framework. Attention is given to (1) the distinction between short-run and long-run effects of policies, (2) the implications of debt and tax financing of government expenditures, and (3) the role of the exchange rate regime in this regard. By identifying the key mechanisms operating in the model, the exposition clarifies the model’s limitations and facilitates comparison with other, more current approaches.

both simple and rank correlations. The finding of a negative relationship between the variance of unanticipated demand shocks and the peak effects of such shocks on real output growth, as predicted by the Lucas supply hypothesis, appears to be rather robust in our developing country data. III. Conclusions At first glance, the assumptions of continuous market clearing and rational expectations formation that are incorporated in Lucas’s analysis seem at variance with common perceptions of the economies of developing countries. If these assumptions were far off

Mr. Peter B. Kenen and Mr. Tamim Bayoumi

,” Vol. 55 , Econometrica ( 1987 ), pp. 251 – 76 . Engle , R.F. , and S. Yoo , “ A Survey of Cointegration ,” mimeo (San Diego : University of California , 1989 ). Frankel , Jeffrey , and Steven Phillips , “ The European Monetary System: Credible at Last? ,” NBER Working Paper No. 3819 (1991); also forthcoming in The Transition to Monetary Union in Europe ( eds. ), Francisco Torres and Francesco Giavazzi . Goldstein , M. , and S.E. Haynes , “ A Critical Appraisal of McKinnon’s World Money Supply Hypothesis ,” American

Mr. Peter B. Kenen and Mr. Tamim Bayoumi
This paper looks at whether the aggregate ERM money supply has been a useful predictor of short-term changes in inflation and growth, and long-term trends in price levels among the core ERM countries. The evidence suggests that over the period since 1987, when there have been no realignments, the ERM money supply performs at least as well, and arguably better, than the individual national aggregates in predicting nominal aggregates such as inflation and the price level, while neither money supply is a good predictor of real activity.
Mr. Charles Adams, R. Fenton, Paul, and Larsen Flemming

the actual product wage will reduce the quantity of labor demanded. Equation ( 13 ) is occasionally written with the change in the unemployment rate as the dependent variable. In that case it follows that a decline in the rate of growth of the warranted product wage relative to the actual product wage will tend to raise the rate of unemployment. The labor supply hypothesis associated with (13) explicitly recognizes the existence of rigidities in wage formation by replacing the competitive market labor supply function with a real wage adjustment function which