The Argentine economy through the lens of an adapted Mundell–Fleming model for small open peripheral economies

Abstract

This paper investigates the limits fiscal and monetary policies face in small openeconomies, where economic growth can be constrained by the balance of payments.To do so, we proceed in three steps. First, we review some usually neglected stringentassumptions of the Post-Keynesian interpretation of the IS-LM-BP model, regarding theroles played by the exchange rate and the interest rate in re-establishing external equilibrium. Second, we adapt this model to consider the specificities of peripheral economies. Third, we illustrate the model’s functionality and implications, drawing upon the experience of the Argentine economy, a country where the external sector has recurrently constrained output growth.