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New Keynesian DSGE Models and the IS-LM Paradigm

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Author Info

  • Ulrich Frische

    ()
    (University of Hamburg)

  • Ingrid Größl

    ()
    (University of Hamburg)

Abstract

New 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 Info

Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 1-2010.

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Length: 33 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:imk:wpaper:1-2010

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  1. Trying to justify IS-LM
    by Economic Logician in Economic Logic on 2010-12-16 15:27:00

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