Theory-Based Models
Theory-Based Models
Theory-Based Models
An open-economy extension of IS-LM adding the external balance condition to study fiscal policy, monetary policy, and capital mobility.
Theory-Based Models
An open-economy policy route showing how the domestic goods-money equilibrium sits relative to the balance-of-payments line.
Core question
How does open-economy balance change the usual IS-LM policy story?
Start with this visual summary, then move to explore for parameter control and compare for side-by-side scenarios.
Variables
Domestic output.
Domestic interest rate.
Rate-output combinations consistent with balance of payments equilibrium.
Visual readout
Output
93.9
Interest rate
3.49
BP-consistent rate
2.95
External-balance gap
0.54
Keep this panel as the fast first pass. Use explore for calibration workflow and compare for alternate scenarios.
Assumptions
The BP line summarizes external financing conditions and capital mobility.
Steeper or flatter BP schedules stand in for lower or higher capital mobility.
Parameters
Demand independent of current output.
How much spending falls when the rate rises.
Money-market baseline rate.
Rate response to higher output in the money market.
External interest-rate anchor.
How external balance responds to domestic output.
Output anchor for the BP schedule.
Shock presets
Lowers the world-rate anchor and eases external financing.
Shifts IS outward.