A Dynamic IS-LM Model with Adaptive Expectations
AbstractWe 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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Bibliographic InfoPaper 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.
Date of creation: Aug 2008
Date of revision:
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)
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- 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.
- McCallum, Bennett T & Nelson, Edward, 1999.
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Blackwell Publishing, vol. 31(3), pages 296-316, August.
- Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
- Bennett T. McCallum & Edward Nelson, . "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," GSIA Working Papers 1997-71, Carnegie Mellon University, Tepper School of Business.
- Casares, Miguel & McCallum, Bennett T., 2006.
"An optimizing IS-LM framework with endogenous investment,"
Journal of Macroeconomics,
Elsevier, vol. 28(4), pages 621-644, December.
- Miguel Casares & Bennett T. McCallum, 2000. "An Optimizing IS-LM Framework with Endogenous Investment," NBER Working Papers 7908, National Bureau of Economic Research, Inc.
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