In terms of depth, range and analytical power, however, Mundell's contribution predominates. The original Mundell-Fleming Model undoubtedly had its limitations. For instance, as in all macroeconomic analysis at the time, it makes highly simplified assumptions about expectations in financial markets and assumes price rigidity in the short run. These shortcomings have been remedied by later researchers, who have shown that gradual price adjustment and rational expectations can be incorporated into the analysis without significantly changing the results. In contrast to his colleagues during this period, Mundell's research did not stop at short-run analysis.
Monetary dynamics is a key theme in several significant articles.
An important problem concerned deficits and surpluses in the balance of payments. In the postwar period, research on these imbalances had been based on static models and emphasized real economic factors and flows in foreign trade. Inspired by David Humes's classic mechanism for international price adjustment which focused on monetary factors and stock variables, Mundell formulated dynamic models to describe how prolonged imbalances could arise and be eliminated. Under fixed exchange rates, for example, when capital movements are sluggish, an expansive monetary policy will reduce interest rates and raise domestic demand. The subsequent balance of payments deficit will generate monetary outflows, which in turn lower demand until the balance of payments returns to equilibrium.