Complete capital mobility

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With complete capital mobility , including complete capital mobility, capital can be moved across borders without time delays and costs and transformed into any form of investment. The aim is to realize the highest returns or the lowest borrowing costs. If the possibility of unrestricted transfer is not available, economics speaks of imperfect capital mobility . In theory, this leads to an equalization of interest rates.

requirements

1. No capital controls - d. H. there must be no obstacles (legal provisions) in the international movement of capital. Then investors can freely choose where they want to invest their capital worldwide.

2. Substitutability of investments - d. H. Investors may not have any preferences for or against investments from certain countries and may only judge them on the basis of their returns. In order for domestic and foreign investments to be completely substitutable, there must be no transaction costs, tax laws must be the same everywhere and there must be no political risks (nationalization, etc.).

Impact / effect

ZZ curve.svg

With complete capital mobility, capital movements take place until the interest rates at home and abroad match. This means that the state of interest parity is reached. If the domestic rate equals the foreign rate level (i = i *), a country has a balance of payments equilibrium. In the Mundell-Fleming model , the IS-LM-ZZ model, an extended IS-LM model that relates to open economies, every point on the ZZ curve represents a balanced balance of payments.

Full capital mobility at fixed exchange rates

Central banks cannot conduct independent monetary policy with full capital mobility and fixed exchange rates . The slightest difference in interest rates causes unlimited flows of capital. It is therefore necessary to intervene until the interest rates have reached the level of the world market again.

Monetary expansion

Monetary Expansion.svg

The attempt by the central bank to expand the money supply leads to the LM curve shifting to the lower right. The economy moves from point E to E '. This creates a balance of payments deficit and thus a deterioration in the exchange rate. The central bank intervenes by selling foreign currency to get domestic money. As a result, the supply of domestic money decreases and the LM curve shifts back up until it has reached point E again.

Fiscal Expansion

Fiscal Expansion.svg

A fiscal expansion increases the interest rate and the output level, with the IS curve shifting to the top right. The higher interest rate leads to an inflow of capital and thus to an improvement in the exchange rate. The central bank has to expand the supply of money (which leads to an increase in income ) in order to keep the exchange rate at its level. When the supply of money has increased so much that the interest rate has returned to its original level, equilibrium is restored.

Full capital mobility with flexible exchange rates

Central banks do not intervene in the foreign exchange market when exchange rates are flexible . The exchange rate adjusts so that the supply and demand for foreign currency balance each other out. As a result, the sum of the current account and the capital account, i.e. the balance of payments, is zero.

Monetary expansion

Increase in money supply

A change in the money supply leads to an increase in income and a deterioration in the exchange rate. To restore equilibrium when the nominal money supply increases, interest rates must fall or income must rise. As a result, the LM curve shifts to the bottom right on LM 'and the point E' is thus in equilibrium. Capital flows cause the exchange rate to deteriorate because interest rates have fallen below world levels. This increases import prices and the competitiveness and demand for domestic goods. This leads to a shift of the IS curve to the right outside until the deterioration in the exchange rate increases demand and output to a level which is at point E ''. At point E '' there is now an equilibrium which is compatible with the world interest rate.

Fiscal Expansion

Fiscal expansion shifts the IS curve to the right, increasing the interest rate, income and underemployment . The rate hike leads to an improvement in the exchange rate because capital is attracted from abroad. As a result of the exchange rate improvement, exports are falling and imports are rising. The cause is a shift in domestic demand towards foreign goods and away from domestic goods. The equilibrium output is not increased. This reduction in competitiveness counteracts an expansionary effect of fiscal policy. This reverses the shift to the right of the IS curve.

Web links

literature

  • H.-W. Wohltmann: Fundamentals of the macroeconomic theory . 4th edition. Oldenbourg, Munich 2005, ISBN 978-3-486-57843-0 .

Individual evidence

  1. ↑ R. Dornbusch, S. Fischer, R. Startz: Macroeconomics . 8th edition. Oldenbourg, Munich 2003, ISBN 978-3-486-25713-7 , pp. 372 .
  2. ↑ a b K. Rittenbruch: Macroeconomics . 11th edition. Oldenbourg, Munich 2000, ISBN 978-3-486-25486-0 , pp. 195 f .
  3. ↑ J. Heubes: Macroeconomics . 4th edition. Franz Vahlen, Munich 2001, ISBN 978-3-8006-0951-2 , pp. 179 .
  4. ↑ R. Dornbusch, S. Fischer, R. Startz: Macroeconomics . 8th edition. Oldenbourg, Munich 2003, ISBN 978-3-486-25713-7 , pp. 376 .
  5. ↑ a b R. Dornbusch, S. Fischer, R. Startz: Macroeconomics . 8th edition. Oldenbourg, Munich 2003, ISBN 978-3-486-25713-7 , pp. 378 .
  6. ↑ R. Dornbusch, S. Fischer, R. Startz: Macroeconomics . 8th edition. Oldenbourg, Munich 2003, ISBN 978-3-486-25713-7 , pp. 379 .
  7. ↑ R. Dornbusch, S. Fischer, R. Startz: Macroeconomics . 8th edition. Oldenbourg, Munich 2003, ISBN 978-3-486-25713-7 , pp. 384 .
  8. ^ H. Dressler: Stability Policy . 7th edition. Oldenbourg, Munich, p. 107 .