Lags and the Assignment Problem: A Note

Mundell [5] has demonstrated that monetary policy should be paired with external balance and fiscal policy with internal balance. This seminal article led to a voluminous literature 1 which at­ tempted to rectify many of the problems inherent in Mundell's flow equilibrium model. Harry John­ son [2] has characterized this extension of Mun­ dell's work as having "... lent itself to almost infinite mathematical product differentiation, with little significant improvement in quality of eco­ nomic product ..." Although we do not fully agree with Harry Johnson-for there are many deficien­ cies in Mundell's model-we do believe that more can be said concerning the "Assignment Problem" in the context of Mundell's model. Specifically, we examine the effects of introducing discrete lags into the Mundell model. Part A of this note presents a generalized discrete time version of Mundell's model and shows that the "Principle of Effective Market Classification" cannot guarantee stability. Part B then examines how the presence of an out­ side lag affects the results of Part A.