Tsiang, Meade and Mundell: models, methods and the marketing of economic ideas* Warren Young and Russell Boyer

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1 1 Tsiang, Meade and Mundell: models, methods and the marketing of economic ideas* Warren Young and Russell Boyer Bar Ilan University and University of Western Ontario Introduction In 1961, Tsiang published his paper " The role of money in trade balance stability: synthesis of the elasticity and absorption approaches" in the American Economic Review. In this paper, Tsiang presented an "intelligible" two-country version of Meade's 1951 open economy model (1961,915). Tsiang's paper was reprinted in the highly influential collection edited by Caves and Johnson (1968) and also in Cooper's widely circulated volume (1969). A few years later, in 1964, Mundell also published what he called a two-country model, as a reply to a critique of his now-famous 1963 CJEPS paper "Capital mobility and stabilization policy under fixed and flexible exchange rates". Mundell adapted his 1964 paper and included it in his 1968 volume International Economics, the only place where it was reprinted. Tsiang also published a cogent critique of some of Mundell s other models (i.e. Mundell, 1960, 1962), albeit a critique which has received only limited attention (Tsiang, 1975; Turnovsky, 1982). Why, then, did Mundell's original two-country model, which was initially an extension of his small open-economy model to encompass the rest of the world, become better known than Tsiang's 1961 two-country model, which can be called the " Meade-Tsiang" model? The object of this paper is to try to answer this question. * Paper to be presented at the Tsiang Memorial Conference, sponsored by the Chung-Hua Institution for Economic Research (CIER), Taipei, Taiwan, June This paper is part of Rusell Boyer and Warren Young, Open Economy Macromodels: origins, development and debates, London: Routledge (copyright, 2005), not to be cited without permission

2 2 In the first section of the paper, we briefly survey some of the main contributions to the two-country approach, from Metzler (1942) up to Tsiang (1961). In the second section, we present the general characteristics, and also the significant policy conclusions, of the " Meade- Tsiang" model; counter-pointing them to Mundell's original 1964 model and 1968 adaptation. In the final section of the paper, we focus upon the metamorphosis of Mundell's original twocountry equational model into an equational-diagrammatic system via Dornbusch and Krugman ( 1976d), Dornbusch (1980), and Frenkel and Razin (1987), and show why this variant of what they called the extended Mundell-Fleming model (Frenkel and Razin, 1987, 567) came to " rule the roost", despite the analytical power of the "Meade-Tsiang" model. Two-country models: from Metzler (1942) to Tsiang (1961) Metzler s 1942 Econometrica paper, "Underemployment Equilibrium in International Trade", is a pioneer amongst the early mathematical models of the open economy. Metzler s static scheme" [his emphasis] (1942, 99) is based upon national accounts equations for an open economy, extended to the two-country case (1942, 99). But the object of Metzler s model was not simply to analyze investment-consumption relations. For, as he wrote, "if certain stability conditions... are satisfied, this fundamental system determines the equilibrium of investment and consumption in each country, and hence total incomes and the balance of trade" (1942, 99), or in other words, the general equilibrium of the two country system. Metzler then turned his " static scheme" into a " dynamic system" by dating the variables and analyzing the stability and equilibrium of the system he proposed (1942, 100). By doing this, he adopted the methods of Hicks s Value and Capital and Samuelson's Foundations (see Young, 1991). But more is involved here, for Metzler was among the first to utilize the Samuelsonian " Correspondence Principle" (Samuelson, 1942;1947; 258, 262); and this, based

3 3 upon Samuelson's as yet unpublished book, which Metzler cited as " The Foundations of Analytical Economics" (1942, 100 note 6). This is readily seen in Metzler s summary of Samuelson's view that " stability depends not only upon the characteristics of the static equations... but also upon the nature of the assumed dynamic system" (1942, 100). Metzler s 1942 model is a two-country model, with domestic prices, interest rate, and exchange rate fixed and no capital movements. His dynamic system consists of "linear difference equations with constant coefficients" (1942, 98,101). Using Samuelson s methods, Metzler is able to analyze " four types" of parametric variation as they affect total consumption, investment, and income, in the respective countries, and the trade balance, dependent on whether one or both of the countries are stable or unstable in isolation. For example, as he writes " domestic expansion will lead to a drain on foreign balances only if the country with which the expanding country deals is stable in isolation". Thus, Metzler continues, " one should always specify which of the countries is assumed to be unstable in isolation and which stable. Many economists will probably prefer to assume that all countries are stable in isolation... With stability conditions specified, directions of change may be determined for all variables except investment in one of the two countries. This remaining ambiguity is attributable to the dual nature of such investment. That is, whenever the balance of trade of a country declines while domestic investment rises (or conversely), the direction of change of total investment cannot be determined without further information... the final outcome under these circumstances depends... upon such nonstability conditions as the relation between marginal propensity to invest and marginal propensity to import (1942, ). Interestingly enough, Metzler s paper antedates Modigliani's Econometrica paper by two years, but while latter is recognized as the apex of the neoclassical synthesis of closed

4 4 economy vintage (Fischer, 1987), the former is not recognized as one of the key starting points of the general equilibrium approach to the open economy. For example, Isard (1995) does not mention Metzler s 1942 paper, nor does Blejer et.al (1995). Harberger's approach, in his 1950 JPE paper " Currency Depreciation, Income and the Balance of Trade" was, according to him, influenced by Metzler, Arrow, Machlup and Modigliani" (1950,47 note 2). It is based upon the assumption of an exchange rate " held fixed by means of national or international stabilization funds", which would be subject to change only via a policy change regarding them. In doing this, Harberger's purpose was to set exchange-rate variations as an independent factor that would generate changes in other systemic variables (1950, 47). His approach consists of two countries producing one "national good". Current income is defined in terms of the " current production" of the " national good". The demand for home and foreign goods is a function of current income and price ratio between these goods, i.e. the terms of trade. All this is expressed in a system of linear differential equations, in order to assess, for example, the change in the balance of trade "as a result of depreciation" (1950, 47-48). In his paper, Harberger distinguishes between " a modern ' full employment' model", " the classical model" and " the Keynesian model" in the two-country case. He goes on to develop " a general model" based upon the generalization of the " Keynesian model", in which he assumes " flexible prices as functions of national production" (1950, 56). Finally, he showed that all the models he presents " are special cases" of his proposed two-country "general model" (1950, 57). Harberger concluded, however, that " the present [1950] simplifications of the theory of international trade reveal certain relationships of macroeconomic magnitudes, but

5 5 conceal others, especially through the assumption of a homogeneous product and a single price level in each country" (1950, 58). In their 1950 Review of Economics and Statistics paper, Laursen and Metzler extended the analysis of Metzler s 1942 paper to the case of flexible exchange rates. Indeed, as they indicated in their mathematical appendix (which greatly influenced Mundell among others, as will be seen below), similar questions had been addressed in Metzler s 1942 paper (1950, ; 298 note 6). The 1950 model is a two-country model with fixed interest rate and no capital movements but with the possibility of price flexibility (1950, 292) under a flexible exchange rate regime. As they wrote, if " the exchange rate is flexible rate... it accordingly takes on a value at which the international payments and receipts between the two countries are equalized. If capital movements are prohibited, the equilibrium exchange rate will be that rate at which each country's exports are equal to its imports" (1950,293). Based upon this, they then presented an equation system which " with given expenditure functions and price levels in both countries" indicated " the equilibrium levels of income as well as the equilibrium exchange rate" (1950, 293). The Samuelsonian Correspondence Principle" method was also used by Laursen and Metzler; that is they examined the conditions of stability and dynamic behavior of their proposed equation system before evaluating their " static equations" (1950, 295). But the main thing to remember here is that the Laursen-Metzler model does not flow from "Keynesian headwaters". Rather, the fundamental problem" the paper tries to address, that is " the degree of economic insulation that can be achieved by a system of flexible exchange rates" (1950, 291) emanated from issues earlier raised a decade earlier by Haberler in the revised edition of Prosperity and Depression (1950, 284, note 10).

6 6 Tsiang and Mundell two-country models: characteristics, comparison and contrast The Tsiang and Mundell two-country models both emanate from what Flanders has termed the "headwaters" of Meade's 1951 Mathematical Supplement. The manuscript of Tsiang's 1961 paper, for its part, was seen and commented upon by Mundell, Fleming, Polak, and Machlup among others (1961, 912). According to Tsiang, the purpose of his paper was to demonstrate the crucial role that could be played by monetary factors and thus to show in a more comprehensive way how relative prices and income- expenditure adjustments combine to determine the effect of a devaluation"(1961,915), going on to say that "our main purpose in this paper... is to achieve a synthesis of elasticity and absorption approaches and to highlight the role played by monetary factors" (1961, 927). In order to achieve his purpose as stated above, Tsiang proceeded to "adopt Meade's simplified two-country two-commodity model... so as to make the system intelligible to the reader without overtaxing his perseverance" (1961, 915). Tsiang's 1961 article combines, then, two papers in one. We will not focus upon his attempt to achieve a synthesis of elasticity and absorption approaches here. Rather we will focus upon his two-country model, its characteristics and policy prescriptions, especially in the area of monetary policy, comparing them to those of Mundell's original two-country model. Now, in his 1961 paper, Tsiang described the key element in " Meade's model for the analysis of the balance of payments" as its inclusion of "the money supply and rate of interest as variables in his model" (1961, 914). We will not go into the technical details of the Meade- Tsiang model here. Below we outline its general characteristics and then compare them to those of Mundell's model accordingly.

7 7 The Meade-Tsiang Model: characteristics and structure As mentioned above, Tsiang's approach was to make Meade's model " intelligible". And, as Tsiang wrote in a footnote " the popularity of Meade's excellent work has suffered a great deal from the overcomplicated model and its formidable list of variables, which he presented at the very beginning of his book, but which he himself abandoned later as too cumbersome to yield any definite result. Even Alexander complained that Meade's model is " unintelligible to any but the most dogged readers" (1961, 915 note 4). But more was involved in Tsiang's efforts to make Meade's model " intelligible ". Meade's 1951 MS approach, was according to Meade himself, "a marriage of the Keynesian and Hicksian type of analysis; and our model constitutes such an attempt" (1951b, 2-3). Meade's original model was initially comprised of over 20 equations and over 40 unknowns, and even after Meade simplified it, his model was comprised of six equations with 16 unknowns (1951b, 13, 27, 32, 46-48). The model also encompassed the possibility of variable exchange rates and mobile capital (1951b, 13-14, 36, 77). The Meade-Tsiang model, as developed in Tsiang's 1961 paper, is a two country-two commodity model with a "system of equations in differentials" (1961, ). The equational system is comprised of sets of equations and functions for the two countries. Tsiang first outlines identities for increments in domestic expenditures (1961, 916, equations 1-2). From these equations he derives what he calls aggregate domestic expenditure functions in real terms (1961, , equations 3-4 and 3a-4a). He then goes on to specify import functions for both countries (1961, 919, equations 7-8). Tsiang proceeds to specify price equations by adopting " Meade's equations for the changes in domestic prices simplified by the assumption of constant money wages" (1961, 921, equations 9-10). He then specifies what he calls simplified demand for money equations for both countries " by getting rid of the assumed link between money

8 8 supply and gold or foreign exchange reserves, as there is hardly any country that mechanically follows this rule of the gold standard game"(1961, 922, equations 13-14). Finally, Tsiang specifies "the balance of trade equation in differentials and in terms of A's currency" (1961, 922, equation 15 ). According to Tsiang, " the eleven equations (1), (2), (3), (4), or alternatively (3a) and (4 a), as we have amended them, (7)-(10) and (13)-(15) should normally be sufficient to determine the eleven variables". In addition he specifies that three variables, the demand for money in the respective countries, and the exchange rate, should "be treated as exogenous policy variables". In other words, Tsiang put Meade's model not only into "intelligible" form, but also into a determinate Walrasian-type open economy general equilibrium framework, which could be used for clear-cut policy prescriptions; something for which Meade's original model could not be utilized due to its complexity. The Meade-Tsiang Model: policy prescriptions Tsiang's focus was on monetary policy and the stability of the exchange rate (1961, ). In his 1961 paper, as Meade before him, he distinguished between " neutral monetary policy" of "Keynesian" and "Orthodox" types. Tsiang defined the " Keynesian" type as being the case where " the domestic rate of interest is specifically assumed to be kept constant by the monetary authorities by maintaining the supply of money and credit infinitely elastic at the existing rate of interest" (1961,924), or in other words, as he put it " Keynesian monetary policy" involved " the pegging of the interest rate at a fixed level with an infinitely elastic supply of money" (1961, 930). Tsiang then defined the " Orthodox" type "as the monetary policy that keeps the money supply of the economy constant" (1961, 924), that is to say, as he put it "under the assumption of" this type of policy "changes in money supply... may be put

9 9 equal to zero, whereas interest rates would be permitted to change freely" (1961, 930). In this context, Tsiang also talked about the policy implications of fixed and flexible exchange rates. As he put it " if a freely fluctuating exchange rate system is adopted in a country with full employment and a Keynesian neutral monetary policy, any slight chance imbalance in trade could cause violent depreciation of the currency as exchange rate would be entirely indeterminate" (1961, 929). Tsiang went on and wrote " we have reached the conclusion that a full employment economy with a Keynesian neutral monetary policy would imply instability in the balance of trade and exchange rate without taking into consideration the possibilities of a wage-price spiral and a destabilizing speculative capital movement". He continued "when these possibilities and taken into consideration, the instability implied in the Keynesian monetary policy will certainly be aggravated"(1961, 930). He then referred to his earlier work ( Tsiang 1958, 1959) in which he showed " that the Keynesian monetary policy... provides precisely the monetary condition that is most conducive to the generation of a cumulative (self aggravating) speculative capital movement; and that the instability of the French franc due to speculative capital flight in the 'twenties, a case which has been much cited as evidence of the inherent instability of a floating exchange rate system, was really made possible and stimulated by the French monetary policy at the time of pegging the interest-rate on the large amount of floating debt then in existence and being issued". Tsiang then said that "those economists with the Keynesian inclination, who decry the traditional reliance on exchange rate adjustment to restore the balance of payments, often forget that one of the chief reasons why devaluation may fail to improve the balance of trade, particularly in the the postwar world of full or over full

10 10 employment, is precisely the monetary policy which they either take for granted or are actively advocating" (1961,930). In his significant concluding remarks, which have been overlooked by most observers, Tsiang said that " the significance of monetary factors... is however entirely obliterated by the usual assumption of constant interest rates supported by infinitely elastic supply of or demand for money with respect to the interest rate, an assumption explicitly or implicitly made in practically all modern Keynesian analyses. Such a monetary assumption, however, would imply instability in the exchange rate as soon as full employment is reached at home, even without allowing for the destabilizing influence of speculative capital movements and the possibility of a wage-price spiral. To take for granted such a monetary policy may have been justified in the deep depression years of the 'thirties, but it is hardly appropriate in the current world of prosperity and high level employment" (1961,935). Tsiang concluded his 1961 paper by saying "It is high time that we abandoned this ubiquitous underlying assumption in our aggregate analysis lest we should scare ourselves out of our own wits in 'discovering' dangerous instability lurking everywhere in our economy (notably for example, the suppose it razor-edge instability of our growth path) and thus clamor for more and more government controls on our economic life"(1961,935).

11 11 Mundell 1964 and 1968: from "Two-Country" to "World" Model Mundell s 1964 Model: characteristics and structure In 1964, Mundell extended what he called the "Keynesian model" he utilized in his now famous1963 CJEPS paper. He called his 1964 approach "A Two-Country Model" (1964, 423). As he put it " In my capital mobility analysis I used a Keynesian model adjusted for foreign trade, capital mobility, and the possibility of exchange-rate changes. I assumed that the economy was too small to affect the world level of interest rates, that the demand for money depended upon income and the rate of interest, and that the entire monetary sector could be lumped into one 'banking system'. These assumptions formed my caricature of reality... Under these circumstances I demonstrated the differential effectiveness of monetary fiscal policy under fixed and flexible exchange rates..."(1964,423). Mundell continued on to say " When we now make modifications to the model to allow for reactions in the rest of the world we know immediately that the simplicity of my original results is modified... I will retain the basic form of my original model except for additional equations encompassing the rest of the world..." (1964, 424). Mundell had already admitted that the conclusions of his 1963 model were literally valid only in a stationary state" (1964, 423 note 3). We will present Mundell's policy "conclusions " below. At this point, let us recall the characteristics and structure of his 1964 model. Mundell's 1964 model consists of two entities:" the home country" and "the rest of the world". It is seven-equation model "expressing the system in a world context". According to Mundell, two equations specify " the flow market for goods and services in each country", which he assumes " is an equilibrium". After setting down his equation for the " home country", Mundell then gives an equation referring " to equilibrium in the market for current

12 12 production in the rest of the world", which also contains " its balance of trade", which Mundell sets as being " equal, but opposite in sign, to the balance of trade in the home country". He then sets down the condition " that the interest rates at home and abroad are assumed to be equal" (1964,425). It is important to recall that in this initial equation set, investment is a function solely of the interest rate, while saving is a function solely of income, with the balance of trade being a function of the income levels in the home country and the rest of the world and the "foreign exchange rate", in Mundell's terms. Mundell then proceeds to specify two equations in order to " insure that the demand for money is equal to the supply of money in each country", where according to his specification, "the demand for money... is assumed to depend upon the interest-rate and domestic income" (1964, 425). Mundell's next two-equation set specifies "the identity between assets and liabilities of the monetary sector", where according to Mundell "assets are distinguished as between foreign [exchange reserves] and domestic [assets of the banking system] claims"; with a final equation fixing " the level of [foreign exchange] reserves in the world", which Mundell "assumed to be constant" (1964, 425). Mundell's 1964 equational system, then, contains seven equations, eight unknowns and four parameters. And, as he wrote, when the foreign exchange rate "is specified, as in the flexible exchange system or when one of the levels of foreign exchange reserves is known, as in the flexible exchange rate system, the results become determinate" (1964, 426).

13 13 Mundell's 1964 Model : Policy Conclusions Mundell's " primary interest" was to gauge the effect of changes in investment or government expenditure, or an open market operation "on the equilibrium levels of income at home and abroad". The results of his 1964 model showed that under fixed exchange rates " an increase in investment or government spending increases income at home, but may increase or decrease income abroad; whereas an open market purchase necessarily increases both income at home and income abroad" (1964,426). According to Mundell, his 1964 result for an open market operation ostensibly contradicted that in his 1963 paper (1963,479), but he justified this by writing that " the stabilization effect of monetary policy in a small country depends upon its impact on income in the rest of the world; and if the marginal propensity to import abroad is disproportionately slight, such a policy would quickly run into the practical limitation that exchange reserves are not inexhaustible" (1964, 427). With regard to the results of his 1964 model under flexible rates, as he wrote " expansive fiscal policy (or investment) increases income both at home and abroad, while monetary expansion increases it home and decreases it abroad"(1964,428). He then qualified these results by saying that while his 1963 paper "argued that fiscal policy would have no effect upon domestic income when capital is mobile and the exchange rate is flexible" (1964, 428), his 1964 model showed that " the major employment-creating effects of fiscal policy in a small country accrue to the rest of the world ", while " fiscal policy in a large country, however, can be effective for domestic stabilization" (1964,429).

14 14 With regard to the effect of monetary policy under flexible rates, as seen in his 1964 model, Mundell wrote that " when the country is small it gets the maximum benefit from monetary policy and the depressing effect on the rest of the world is correspondingly greatest (1964,430). Mundell concluded his 1964 paper by saying that " in my [1963] paper I considered stabilization policy in a country too small to exert any significant influence upon the rest of the world. I have now relaxed this assumption and included the rest of the world explicitly in my caricature. The conclusions of my [1963] paper must, therefore, be interpreted as special cases of the present results" (1964, 430). Policy Conclusions of Mundell 1968 vs. Policy Prescriptions of Tsiang 1961 Mundell "adapted" his 1964 paper for inclusion in his 1968 volume International Economics as the appendix to Chapter 18, which for its part, was an adaptation of his famous 1963 CJEPS paper. The most significant difference between Mundell's 1964 and 1968 versions can be seen in his " Concluding Remarks". There he talked about "expenditure effects of the Ohlin-type". We will not go into the technical aspects of these effects here. What is important, however, for our purpose is Mundell's conclusion that "The incorporation of these expenditure effects into the Keynesian international trade model is important theoretically because it illustrates, more powerfully than is implied by my original 1963 article, the similarity between the conclusions reached by classical and Keynesian methods, when all relevant effects have been incorporated. For a small country fiscal policy, under either fixed or flexible exchange rates, alters the balance of trade but does not necessarily improve the level of output and employment. Monetary policy under a system of fixed exchange rates becomes a means altering the level of reserves of a (small) country, whereas monetary policy under a

15 15 system of flexible exchange rates becomes a means of adjusting the price level and, therefore, if money wage rates are rigid, the level of employment and output" (1968,271). It is clear that Mundell's 1968 conclusion as cited above regarding the similarity of what Mundell called Keynesian and classical methods, is diametrically opposite to that reached by Tsiang regarding what he called "Keynesian" as against "Orthodox" policies. But this is not surprising in light of the fact that in his 1963 paper and its 1964 extension and 1968 adaptation, Mundell had been using a "Keynesian international trade model", on his own account, whereas Tsiang had been using a Walrasian-type general-equilibrium approach (as manifest in the number of his equations being equal to the number of variables so as to ensure a determinate system). Both Mundell's "solution set" and that of Tsiang follow directly from the inherent nature of their respective "assumption sets (Mundell, 1968, 271). Why, then, has Mundell's approach come to "rule the roost", whereas that of Tsiang is remembered only by specialists in the field? It is to this question that we now turn. Dornbusch vs. Tsiang: the "marketing" of Mundell's models and method In his paper " Exchange rates and fiscal policy in a popular model of international trade" published in the December 1975 issue of AER, Dornbusch wrote that the " integration" of the " elasticity approach" model "with the 'absorbtion approach" and macroeconomics has never been demonstrated"(1975b, 859). In this paper, Dornbusch did not mention Tsiang's 1961 paper, nor the work of Johnson (1961) as they appeared in the well known AEA-sponsored Caves and Johnson volume (1968). And this, despite the fact that in the preface to their volume, Caves and Johnson had written that the contributions of Tsiang and Johnson had "gone some distance" toward "providing an

16 16 integrated account of all the underlying adjustments" in the "absorption" and "elasticity" approaches "by showing the essential role of both income and price effects. Tsiang's paper does this in the framework of a formal model, Johnson's in the spirit of providing guidance in the operational analysis of the effects of the valuation" (1968, preface, ix). Indeed, nowhere in Dornbusch's published articles from 1971 onwards, up to his 1980 book Open Economy Macroeconomics, is Tsiang's 1961 paper mentioned, nor is cited in the book itself. Moreover, in his published work between 1976 and 1980, Dornbusch did not mention Tsiang's very important 1975 QJE Critique of Mundell's 1960 QJE and 1962 IMFSP models and methodology. On the other hand, from 1976 onwards, Dornbusch " promoted " the models Mundell presented in his 1968 volume International Economics, especially Mundell's " twocountry" model. Indeed, Dornbusch promoted Mundell s two-country model, despite the fact that Dornbusch himself had developed a two-country model equational-diagrammatic system in his Ph.D thesis (1971a), and published it in his 1973 JPE paper Currency Depreciation, Hoarding, and Relative Prices (1973a), where he did not cite Tsiang s 1961 contribution. For example, in his 1976 paper with Krugman, Dornbusch wrote " the analysis becomes considerably more interesting when it includes capital mobility and interaction between countries in the determination of macroeconomic equilibrium, following the theories of Mundell and Fleming" (1976d, 543). Dornbusch then presented a diagrammatic exposition of the equational system set out by Mundell in Chapter 18 of International Economics (1968), which Mundell himself "adapted" from his own 1964 paper (1976d, 543 note 7). This diagram, of what he called " the two-country model with perfect capital mobility" (1976d, 543) as presented in his paper with Krugman, and then set out in different form, in his 1980 book Open Economy Macroeconomics, seems to have provided the main "selling point" for

17 17 Dornbusch's marketing of Mundell's 1964 " two-country" and 1968 "world model" approach. According to Dornbusch, his 1976 diagram is based upon the following equilibrium conditions and functional relationships " the equations are those for monetary equilibrium in each country... and for equilibrium conditions in the goods market. In the goods market, prices are fixed in each country's currency and the supply of output is perfectly elastic. The demand for a country's output is equal to that country's expenditure plus the trade surplus or net exports. The trade surplus, in turn, is a function of the exchange rate--the relative price of goods or the terms of trade--as well as of both countries incomes. The model is completed by the requirement that interest rates be the same in the two countries"(1976d, 543). Dornbusch's 1976 "AA-WW" diagram in domestic-foreign income or output space is not as well known as its 1980 counterpart, and thus it deserves our attention here, as do its policy predictions". As he wrote " the AA schedule picks the combinations of thing come levels her that yield monetary equilibrium and equality of interest rates" [Dornbusch's emphasis] (1976d, ). The "AA schedule" has a positive slope whose "magnitude depends on relative income and interest elasticities at home and abroad"(1976d, 544). Dornbusch's "WW schedule", for its part " expresses equilibrium in the two countries' goods and money markets", and "is generated by alternative exchange rates, given money supplies and fiscal policy"; this schedule has a negative slope (1976d, ). At the " initial equilibrium point", that is to say where "AA" cuts "WW", Dornbusch maintains that not only do the "goods and money markets clear in each country ", but "interest rates are equalized as required under perfect capital mobility" (1976d, 545).

18 18 Dornbusch emphasized importance of his 1976 diagram--in domestic-foreign income space as follows: " one of the very strong predictions of the Mundell- Fleming model concerns a monetary expansion in one country. The model implies that income will rise in the country where the money supply increases and that income will fall abroad. The accompanying diagram is helpful in understanding that adjustment process" (1976d, 546). The diagram in Dornbusch's 1980 book Open Economy Macroeconomics in " interestrate-terms of trade space" (1980b, ) is well known and will not be dealt with in detail here. Indeed, in a note in his 1980 book, Dornbusch actually referred the reader back to his 1976 paper with Krugman, when as he put it "for an alternate diagram see Dornbusch and Krugman (1976) " (1980b, 199). Rather, we turn to the " two-country" diagram of Frenkel and Razin (1987) to show the power of Dornbusch's diagrammatic approach in the marketing of Mundell's 1964 and 1968 "two- country" models. In their well known 1987 IMFSP Paper "The Mundell-Fleming model quarter-century later: a unified exposition", Frenkel and Razin presented their "two-country" diagram in foreign-domestic income (output) space, but actually reversed the axes of Dornbusch's 1976 diagram (1987, ,596-97). In other words, despite the non-standardization of Dornbusch's diagrammatic representation of Mundell's 1964 and 1968 model, as seen in the difference between his own 1976 and 1980 diagrams, what we would call the Mundell-Dornbusch equationaldiagrammatic approach came to dominate "two-country" modelling, just as the one-country Fleming-Mundell model displaced, with the assistance of Dornbusch's efforts, as manifest in his papers during the 1970s and 1980 book, the Swan-Salter and Polak-Johnson approaches (Polak, 1998, 2002; Young and Darity 2004).

19 19 To sum up, the following may be said. Analogous to the case of Meade's closed-economy equational approach, which was upstaged by the Hicks-Hansen equationaldiagrammatic system (Young, 1987; Darity and Young, 1995), so the Meade-Tsiang 1961 equational approach was upstaged by the Mundell- Dornbusch equational-diagrammatic system. In order to tell the complete story, however, we will try to track down correspondence between the protagonists relating to the issues raised in this paper. For, as we have shown elsewhere (Young 1987; Young, Leeson and Darity, 2004), the interaction between economists in the development and "marketing" of their ideas can be just as important in explaining the dissemination of these ideas, as the publication of the ideas themselves.

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