The 3-Equation New Keynesian Model --- A Graphical Exposition

Wendy Carlin · David Soskice

110 citations0/0 files storedTopics in Macroeconomics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Abstract We develop a graphical 3-equation New Keynesian model for macroeconomic analysis to replace the traditional IS-LM-AS model. The new graphical IS-PC-MR model is a simple version of the one commonly used by central banks and captures the forward-looking thinking engaged in by the policy maker. Within a common framework, we compare our model to other monetary-rule based models that are used for teaching and policy analysis. We show that the differences among the models centre on whether the central bank optimizes and on the lag structure in the IS and Phillips curve equations. We highlight the analytical and pedagogical advantages of our preferred model. The model can be used to analyze the consequences of a wide range of macroeconomic shocks, to identify the structural determinants of the coefficients of a Taylor type interest rate rule, and to explain the origin and size of inflation bias.

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References

1993Discretion versus policy rules in practice 2005INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY 1999The Science of Monetary Policy: A New Keynesian Perspective 1996Staggered Prices in a Utility-Maximizing Framework 2002Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve 1997Inflation forecast targeting: Implementing and monitoring inflation targets 1967Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time 1997The New Neoclassical Synthesis and the Role of Monetary Policy

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