Basic Models of Fluctuations
NIA Closed/Open Economy
Current account (net exports)
\(CA = X_E(Y^*, \rho) - X_I(\rho, Y, Y^*) \)
where exports are an increasing function of foreign income and real exchange rate and imports are an increasing function of both plus domestic income.
Capital account:
\(\sigma (i - i*) + k\)
where \(\sigma\) is capital mobility (perfect = infinity), times the interest rate plus a constant.
Equilibrium is when BoP = IS = LM.
Keynesian Closed Economy Model (IS-LM)