A Note on the Mundell-Fleming Model: Policy Implications on Factor Migration

Abstract

The policy implications of the seminal Mundell-Fleming model are reviewed in the classicallong-term regime of the full Neo-Keynesian macroeconomic model. It is shown that, besides thetemporary capital flows described by the Mundell-Fleming model, both fiscal and monetarypolicy may have longer lasting effects on factor migration. A positive policy shock motivatesemigration of labour and inflow of capital, and vice versa. Under imperfect mobility of labour,the effect on labour migration depends on whether the domestic transaction costs of revisingthe contracts are higher or lower than the costs of international mobility.