The 3-Equation New Keynesian Model --- A Graphical Exposition
AbstractWe 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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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.
Volume (Year): 5 (2005)
Issue (Month): 1 (December)
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Other versions of this item:
- Carlin, Wendy & Soskice, David, 2004. "The 3-Equation New Keynesian Model: A Graphical Exposition," CEPR Discussion Papers 4588, C.E.P.R. Discussion Papers.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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