New Keynesian DSGE Models and the IS-LM Paradigm
AbstractNew Keynesian DSGE models propose a dynamic and expectational version of the old IS-LM paradigm. Acknowledging that the Taylor rule as a substitute for the LM-curve has its merits we show that standard DSGE models do not model how the central bank achieves its targets. In filling this gap we make evident that models neglecting a store-of-value function of money but still assuming a Taylor rule are inconsistent. Our major point concerns the-so called new Keynesian IS-curve. We prove that DSGE models which typically rest on the assumption of representative agents are unable to derive the IS-curve. This implies that these models lack the capability to analyse the role of savings as a a gap in aggregate demand. By assuming overlapping generations we make evident how this shortcoming can be avoided. We also show how OLG models add a richer dynamics to the standard DSGE approach.
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Bibliographic InfoPaper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 1-2010.
Length: 33 pages
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-13 (All new papers)
- NEP-CBA-2010-11-13 (Central Banking)
- NEP-DGE-2010-11-13 (Dynamic General Equilibrium)
- NEP-MAC-2010-11-13 (Macroeconomics)
- NEP-MIC-2010-11-13 (Microeconomics)
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