How well does the Mundell-Fleming model fit Australian data since the collapse of Bretton Woods?

Abstract

Australian time series for the nominal interest rate, real output, the nominal exchange rate, prices and nominal money since 1973 are characterized by a vector autoregressive process driven by five exogenous disturbances. Those disturbances are identified so that they can be interpreted as the five main sources of fluctuations found in the Mundell - Fleming model of a small open economy under flexible exchange rates, namely: world interest rate, aggregate supply, IS, money supply and money demand shocks. The dynamic responses of the estimated model to the structural shocks are analysed and shown to match most of the predictions of the Mundell - Fleming model.