<p>The expression "<strong>Static Expectations</strong>" unfortunately can be found to be used with two different meanings in the economics literature  </p>

<p><strong>1)</strong> The one apparently less used but used nevertheless is, for some variable $x$ that needs to be predicted while standing at period $t$ (the superscript $e$ denotes "expectation" in the general meaning of the term, without specifying how it is formed) </p>

<p>$$x^e_{t+1 |t} = b,  \;\;\; \forall\, t$$</p>

<p>where $b$ is some <em>constant</em>. This reflects the following attitude: agents are oblivious to any information accrual as time passes, they even ignore possible movements in the realized values of $x$, and if asked, they always think that "tomorrow" the value will be $b$ (perhaps a better way to describe such expectations would be "fixed expectations" rather than "static").</p>

<p><strong>2)</strong> The other and most widely used meaning of "Static expectations" is</p>

<p>$$ x^e_{t+k |t} = x_t, k=1,2,...$$</p>

<p>i.e. "what is will continue to be".</p>

<p>In the Mundell-Fleming model, the expression is used with this meaning.  </p>

<p>(I note that with this meaning, "Static Expectations" <em>coincide</em> with Rational Expectations when the $x$-variable follows a pure random walk -but again, in Static Expectations we do not specify how we arrive at the value we expect).</p>

<p>Given this, <strong>imperfect capital mobility</strong> would lead to the domestic interest rate being different in equilibrium from the international interest rate in the sense $i \neq i^*$, since the exchange rate is not expected to change. So the Uncovered Interest Rate Parity (in logarithmic terms) $i = i^*+\Delta s^e$ becomes under Static Expectations $i = i^*$, and stops to hold under imperfect capital mobility.</p>

CC BY-SA 3.0
2017-05-07T17:48:25.960Z
2017-05-07T20:10:47.990Z
2017-05-07T20:10:47.990Z
Alecos Papadopoulos
<p>When I was studying the Mundell-Fleming Model, I came across the assumptions :</p>
<blockquote>
<p>1- Exchange rate expectations are static</p>
<p>2- Capital mobility is less than perfect</p>
</blockquote>
<p>I ended up with the following questions :</p>
<p>Q1) Does capital mobility less than perfect implies <span class="math-container">$r \ne r^{*}$</span> where <span class="math-container">$r$</span> is the domestic interest rate and <span class="math-container">$r^{*}$</span> is the foreign interest rate. Or does it mean <span class="math-container">$r \neq r^{*} + \delta S^{e}$</span> Which is the UIRP</p>
<p>Q2) What is meant by &quot;exchange rate expectations are static&quot;?</p>

CC BY-SA 3.0
2017-05-07T17:36:04.730Z
In the standard Mundell-Fleming model, capital mobility _is_ assumed perfect. You must be examining some variant?
Alecos Papadopoulos
<macroeconomics>
What is meant by "Exchange rate expectations are static" (In the Mundell-Fleming model)
Kuantew
# What is meant by "Exchange rate expectations are static" (In the Mundell-Fleming model)

(Asked by: username_0 on 2017-05-07)

When I was studying the Mundell-Fleming Model, I came across the assumptions :

> 1- Exchange rate expectations are static
>
> 2- Capital mobility is less than perfect

I ended up with the following questions :

Q1) Does capital mobility less than perfect implies $r \ne r^{\*}$ where $r$ is the domestic interest rate and $r^{\*}$ is the foreign interest rate. Or does it mean $r \neq r^{\*} + \delta S^{e}$ Which is the UIRP

Q2) What is meant by "exchange rate expectations are static"?

**Tags:** macroeconomics

> **Comments:**
> **username_1**: In the standard Mundell-Fleming model, capital mobility _is_ assumed perfect. You must be examining some variant?  

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## 1 answers

### Answer by username_1 on 2017-05-07. Score: 1 | Accepted answer

The expression "**Static Expectations**" unfortunately can be found to be used with two different meanings in the economics literature

**1)** The one apparently less used but used nevertheless is, for some variable $x$ that needs to be predicted while standing at period $t$ (the superscript $e$ denotes "expectation" in the general meaning of the term, without specifying how it is formed)

$$x^e\_{t+1 |t} = b, \;\;\; \forall\, t$$

where $b$ is some *constant*. This reflects the following attitude: agents are oblivious to any information accrual as time passes, they even ignore possible movements in the realized values of $x$, and if asked, they always think that "tomorrow" the value will be $b$ (perhaps a better way to describe such expectations would be "fixed expectations" rather than "static").

**2)** The other and most widely used meaning of "Static expectations" is

$$ x^e\_{t+k |t} = x\_t, k=1,2,...$$

i.e. "what is will continue to be".

In the Mundell-Fleming model, the expression is used with this meaning.

(I note that with this meaning, "Static Expectations" *coincide* with Rational Expectations when the $x$-variable follows a pure random walk -but again, in Static Expectations we do not specify how we arrive at the value we expect).

Given this, **imperfect capital mobility** would lead to the domestic interest rate being different in equilibrium from the international interest rate in the sense $i \neq i^\*$, since the exchange rate is not expected to change. So the Uncovered Interest Rate Parity (in logarithmic terms) $i = i^\*+\Delta s^e$ becomes under Static Expectations $i = i^\*$, and stops to hold under imperfect capital mobility.


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