Teaching New Keynesian Open Economy Macroeconomics at the Intermediate Level

For the open economy, the workhorse model in intermediate textbooksstill is the Mundell-Fleming model, which basically extends theinvestment and savings, liquidity preference and money supply (IS-LM)model to open economy problems. The authors present a simple NewKeynesian model of the open economy that introduces open economyconsiderations into the closed economy consensus version and that stillallows for a simple and comprehensible analytical and graphicaltreatment. Above all, their model provides an efficient tool kit for thediscussion of the costs and benefits of fixed and flexible exchangerates, which also was at the core of the Mundell-Fleming model.