ZZ curve

The ZZ curve or FE curve represents within the Keynesian Mundell-Fleming model an equilibrium of the balance of payments between the balance of the current account and the capital account . Depending on the course of the curve within an r / Y diagram, conclusions can be drawn about perfect capital mobility or imperfect capital mobility possible.

The equation of the ZZ curve is: ${\ displaystyle \! \ X (Y ^ {*}, e) -Im (Y, e) + F (r, r ^ {*}) = 0.}$

X = domestic exports
Im = domestic imports from abroad
F = balance of the financial account
Y = income
r = interest rate
e = exchange rate
* = foreign size

Current account

According to the equation, the export volume is positively dependent on foreign income and increases with devaluation of the domestic currency. The import volume increases with increasing domestic income and with an appreciation of the domestic currency.

Financial account

If the domestic interest rate r rises, the capital import rises , since it seems more worthwhile for foreign investors to invest their money at the highest possible interest rate. When the foreign interest rate rises, the export of capital rises, since foreign investments become more attractive. Thus, the balance of the financial account is positively dependent on the domestic interest rate and negatively on the foreign interest rate. ${\ displaystyle r> r *}$ ${\ displaystyle r *> r}$

literature

Paul Krugman, Maurice Obstfeld: International Economy. Theory and Politics of Foreign Trade. 7th edition, Pearson Studium, Munich 2006.