Three Pane Model
A Brief Note on Open Economy ISLM Model (Three-Paned Model)
Utility for Business Managers: Firms resort to macroeconomic analysis to make rational judgments about the effects of global events or policy shocks on the economy and thereby on the business environment. But such analysis is often laden with possibilities for logical missteps. The Three- Pane model (open economy IS/LM model) is discussed here as a tool for explaining key relationships in the economy while avoiding the missteps encountered in macroeconomic analysis.
What is open economy macroeconomics?
Macroeconomic analysis helps firms to explore the interrelationships among a whole host of markets, while microeconomics focuses on variables like price and quantity, & cost and revenue in individual markets. Macroeconomic analysis can be closed-economy or open -economy. Closed-economy macroeconomics deals with movements in and relationships among aggregate variables such as National Income, rate of interest, the aggregate price level, rate of inflation etc. Open economy macroeconomics makes the analysis complete by adding analysis of capital flows, international trade and exchange rate.
The objective of this note is to introduce the Three-paned or Open-economy IS/LM model. As we will see, this model is an extension of the simple closed-economy IS/LM model.
A Little Bit of History: The IS/LM closed economy model was introduced by the British Economist, Sir John Hicks in 1937. The IS/LM model denotes the simultaneous equilibrium of the two key markets in a market economy, product (real) market and the money market. IS represents real/product market equilibrium and LM, money market equilibrium. IS refers to the fundamental relationship between Investment (I) and Saving(S). LM represents the relationship between L, the demand for money, and M, the supply of money.
The open economy version of IS/LM is credited to two economists, Robert Mundell & Marcus Fleming and hence called the
Utility for Business Managers: Firms resort to macroeconomic analysis to make rational judgments about the effects of global events or policy shocks on the economy and thereby on the business environment. But such analysis is often laden with possibilities for logical missteps. The Three- Pane model (open economy IS/LM model) is discussed here as a tool for explaining key relationships in the economy while avoiding the missteps encountered in macroeconomic analysis.
What is open economy macroeconomics?
Macroeconomic analysis helps firms to explore the interrelationships among a whole host of markets, while microeconomics focuses on variables like price and quantity, & cost and revenue in individual markets. Macroeconomic analysis can be closed-economy or open -economy. Closed-economy macroeconomics deals with movements in and relationships among aggregate variables such as National Income, rate of interest, the aggregate price level, rate of inflation etc. Open economy macroeconomics makes the analysis complete by adding analysis of capital flows, international trade and exchange rate.
The objective of this note is to introduce the Three-paned or Open-economy IS/LM model. As we will see, this model is an extension of the simple closed-economy IS/LM model.
A Little Bit of History: The IS/LM closed economy model was introduced by the British Economist, Sir John Hicks in 1937. The IS/LM model denotes the simultaneous equilibrium of the two key markets in a market economy, product (real) market and the money market. IS represents real/product market equilibrium and LM, money market equilibrium. IS refers to the fundamental relationship between Investment (I) and Saving(S). LM represents the relationship between L, the demand for money, and M, the supply of money.
The open economy version of IS/LM is credited to two economists, Robert Mundell & Marcus Fleming and hence called the