Welcome to the Matrix, Mundell and Fleming

I have come up with an algorithm to quickly predict currency movements in the above mentioned model. I have used the following conventions:

  • A positive (+) denotes high mobility, expansionary policy and appreciating currency.
  • A negative (-) denotes low mobility, contractionary policy and depreciating currency.

This is one of the cases that I would rather automate my answer than engage in active thinking to decide the chain of events, which is a big drain of stamina. This won’t take longer than a minute and you might as well relax a moment while your “hand answers the question for you”.

I like the way you think.

What does F stand for?

You have:

  • A negative (-) denotes low mobility, contractionary policy and depreciating currency.

And then you say:

" In a contractionary M there can only be a currency appreciation and vice versa"

Am I missing something?

Contractionary M is denoted by “-M” column. What I mean is underneath that column the cells are labelled “+” to complete the table. Check the yellow cells in Step 3 and see their relationship with the column headers…

F=fiscal policy

M=monetary policy

This may look odd at first but the information is really basic and there is nothing new to learn. Just a mnemonic of sorts.

The reason I did not fully label the columns and rows is because it takes time to write down the words monetary and fiscal at least six times.


had some questions regarding this topic;

  1. How come when both monetary and fiscal policy are expansionary, they are uncertain for high capital mobility? Wouldn’t monetary policy dominate in a high capital mobility environment (thus calling for devaluation in the currency)?

  2. When monetary policy is expansionary while fiscal policy is restricitve (or vise versa) why we be uncertain in a low capital mobility environment? doesn’t fiscal policy always dominate in the low capital mobility environment?

  3. I understand how expansionary fiscal policy causes depreciation of the domestic currency, but how does restrictive fiscal policy cause the domestic currency to appreciate?

Thanks and appreicate the help