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A Dynamic IS-LM Model with Adaptive Expectations

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Author Info
Moisa Altar (Faculty of Finance and Banking, Bucharest University of Economics)

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Abstract

We analyze the stability of a discrete-time dynamic model with an IS-LM structure. We assume that the Aggregate Supply function is of Lucas type, and the monetary policy rule is of Friedman type. The mechanism of expectations formation is assumed to be of adaptive type (Friedman-Cagan). In its final form, the model contains two state variables, namely money supply and expected inflation. From the mathematical point of view, it is an affine discrete-time system, whose stability properties are analyzed in the paper. We deduce sufficient conditions concerning the "learning coefficient" involved in the Friedman-Cagan type of forecast equation, so that the model is stable.

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File URL: http://www.dofin.ase.ro/carfib/wpaefr/wpaefr_15.pdf
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File Function: First version, 2008
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Publisher Info
Paper provided by Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB in its series Advances in Economic and Financial Research - DOFIN Working Paper Series with number 15.

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Date of creation: Aug 2008
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Handle: RePEc:cab:wpaefr:15

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Web page: http://www.dofin.ase.ro/carfib/
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Related research
Keywords: steady state; Lucas type AS function; Friedman type monetary policy rule; stability conditions;

Find related papers by JEL classification:
A10 - General Economics and Teaching - - General Economics - - - General
C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
E00 - Macroeconomics and Monetary Economics - - General - - - General
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

References listed on IDEAS
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  1. Miguel Casares & Bennett T. McCallum, 2000. "An Optimizing IS-LM Framework with Endogenous Investment," NBER Working Papers 7908, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Umberto Neri & Beatrice Venturi, 2007. "Stability and bifurcations in IS-LM economic models," International Review of Economics, Springer, vol. 54(1), pages 53-65, March. [Downloadable!] (restricted)
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This page was last updated on 2009-11-26.

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