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A Technical Note on the Open Economy IS/LM Model
Warnock, Francis E. Technical Note BP-0528 / Published August 14, 2008
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This technical note introduces the basic structure of what we call the Three-Paned Model. The model is essentially just an "opening up" of the closed-economy IS/LM Model, with the main pane being the IS/LM Model (modified only slightly to allow for international trade) and two additional panes that determine the amount of capital inflows, net exports, and the exchange rate. This note is not a substitute for the more in-depth presentation of these models found in textbooks, but should be used to complement each textbook's richer treatment of the theoretical and technical aspects of these models.


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  • Overview

    This technical note introduces the basic structure of what we call the Three-Paned Model. The model is essentially just an "opening up" of the closed-economy IS/LM Model, with the main pane being the IS/LM Model (modified only slightly to allow for international trade) and two additional panes that determine the amount of capital inflows, net exports, and the exchange rate. This note is not a substitute for the more in-depth presentation of these models found in textbooks, but should be used to complement each textbook's richer treatment of the theoretical and technical aspects of these models.

  • Learning Objectives