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

Author

Listed:
  • Carlin Wendy

    (University College London)

  • Soskice David

    (Duke University)

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.

Suggested Citation

  • Carlin Wendy & Soskice David, 2005. "The 3-Equation New Keynesian Model --- A Graphical Exposition," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-38, December.
    • Handle: RePEc:bpj:bejmac:v:contributions.5:y:2005:i:1:n:13
    DOI: 10.2202/1534-6005.1299
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    Cited by:

    1. Bhavesh Salunkhe & Anuradha Patnaik, 2018. "The IS Curve and Monetary Policy Transmission in India: A New Keynesian Perspective," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 12(1), pages 41-66, February.
    2. Soskice, David & Carlin, Wendy, 2007. "Reforms, Macroeconomic Policy and Economic Performance in Germany," CEPR Discussion Papers 6415, C.E.P.R. Discussion Papers.
    3. Roberto Tamborini, 2007. "Rescuing the LM (and the money market) in a modern Macro course," Department of Economics Working Papers 0706, Department of Economics, University of Trento, Italia.
    4. Mark Setterfield & Kurt von Seekamm, 2012. "Stabilization Policy with an Endogenous Commercial Bank," Chapters, in: Louis-Philippe Rochon & Salewa ‘Yinka Olawoye (ed.), Monetary Policy and Central Banking, chapter 2, Edward Elgar Publishing.
    5. Kiefer, David, 2015. "Targets and lags in a two-equation model of US stabilization," Economic Modelling, Elsevier, vol. 44(C), pages 18-24.
    6. Evan C. Tanner, 2018. "The Algebraic Galaxy of Simple Macroeconomic Models: A Hitchhiker’s Guide," Open Economies Review, Springer, vol. 29(1), pages 177-209, February.
    7. Roberto Tamborini, 2006. "Back to Wicksell? In search of the foundations of practical monetary policy," Department of Economics Working Papers 0602, Department of Economics, University of Trento, Italia.
    8. Peter Bofinger & Eric Mayer & Timo Wollmershäuser, 2009. "Teaching New Keynesian Open Economy Macroeconomics at the Intermediate Level," The Journal of Economic Education, Taylor & Francis Journals, vol. 40(1), pages 80-102, January.
    9. Tatiana Kirsanova & Sven Jari Stehn & David Vines, 2006. "Five-Equation Macroeconomics A Simple View of the Interactions Between Fiscal Policy and Monetary Policy," Discussion Papers 0610, University of Exeter, Department of Economics.
    10. Hiermeyer, Martin, 2019. "An Improved IS-LM Model To Explain Quantitative Easing," MPRA Paper 92394, University Library of Munich, Germany.
    11. Hawkins, Raymond J., 2017. "Macroeconomic susceptibility, inflation, and aggregate supply," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 15-22.
    12. Pavel S. Kapinos, 2010. "A New Keynesian Workbook," International Review of Economic Education, Economics Network, University of Bristol, vol. 9(1), pages 111-123.
    13. Gobbi, Lucio & Mazzocchi, Ronny & Tamborini, Roberto, 2019. "Monetary policy, de-anchoring of inflation expectations, and the “new normal”," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    14. Mark Setterfield, 2015. "Won’t Get Fooled Again – Or Will We? Monetary Policy, Model Uncertainty, and ‘Policy Model Complacency’," Working Papers 1516, New School for Social Research, Department of Economics, revised Jan 2016.
    15. Waldo Mendoza Bellido, 2017. "Teaching Modern Macroeconomics in the Traditional Language: The IS-MR-AD-AS Model," Documentos de Trabajo / Working Papers 2017-443, Departamento de Economía - Pontificia Universidad Católica del Perú.
    16. Sánchez, Marcelo, 2011. "Robust central banking under wage bargaining: Is monetary policy transparency beneficial?," Economic Modelling, Elsevier, vol. 28(1), pages 432-438.
    17. Christopher Allsopp & David Vines, 2005. "The Macroeconomic Role of Fiscal Policy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 21(4), pages 485-508, Winter.
    18. Benigno, Pierpaolo, 2015. "New-Keynesian economics: An AS–AD view," Research in Economics, Elsevier, vol. 69(4), pages 503-524.
    19. Hiermeyer, Martin, 2018. "An Improved LM Curve," MPRA Paper 87631, University Library of Munich, Germany.
    20. David Kiefer, 2011. "Targets, Policy Lags and Sticky Prices in a Two-Equation Model of US Stabilization Policy," Working Paper Series, Department of Economics, University of Utah 2011_03, University of Utah, Department of Economics.
    21. Sajid Anwar & S. Zahid Ali, 2007. "Exogenous Shocks and Exchange Rate Management in Developing Countries," Finance Working Papers 22245, East Asian Bureau of Economic Research.
    22. David Kiefer, 2010. "A 2-Equation Model of the North Atlantic Economies, a Dynamic Panel Study," Working Paper Series, Department of Economics, University of Utah 2010_06, University of Utah, Department of Economics.
    23. Nathan Perry & Nathaniel Cline, 2016. "What caused the great inflation moderation in the US? A post-Keynesian view," Review of Keynesian Economics, Edward Elgar Publishing, vol. 4(4), pages 475-502, October.

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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