Monday, June 22, 2015

Capital Mobility

When looking at exchange rate policies (fixed vs. flexible exchange rates) one of the factors that is considered in the IS/LM/BP model is the degree of capital mobility within the domestic economy.  Typically four versions are modeled:  perfectly flexible, relatively flexible, relatively inflexible and perfectly inflexible - where relatively flexible or inflexible is in comparison to the domestic money market.  While this is a theoretic concept, examples of changes in capital mobility are rare.  Here is an exception - Saudi Arabia is opening up its stock market to foreign investors, meaning that the movement of capital in (and out) of the Kingdom is increasing.  Theoretically, this would be an increase in capital mobility.

No comments: