Equilibrium income and monetary policy strategy: teaching macroeconomics with the MP curve
AbstractThe aim of the paper is to present a derivation of a simple tool describing monetary policy behaviour, useful to teach macroeconomic policies in open economies, the MP curve. The objective is to overcome the limits of the standard IS-LM model and underline the importance of the central bank strategy in influencing output and employment. We demonstrate that if the main policy instrument is the interest rate, the monetary policy authorities have very great influence in determining macroeconomic equilibrium. In fact the monetary policy strategy - of which the MP curve is the representation - is able to create, once given the dynamic supply curve and the IS curve, different levels of income in accordance to the inflation target, or different levels of inflation in accordance to the income target. Furthermore - because the nature and form of the MP curve depends both on constraints and targets the monetary policy considers and they might not be correctly interpreted - the central bank could assume a misleading behaviour, guiding the economic system toward a level of activity, not consistent with full employment and price stability
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 12255.
Date of creation: 18 Dec 2008
Date of revision:
teaching intermidiate macroeconomics; monetary policy strategy; equilibrium income;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-03 (All new papers)
- NEP-MAC-2009-01-03 (Macroeconomics)
- NEP-MON-2009-01-03 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Bofinger & Eric Mayer & Timo Wollmersh�user, 2006. "The BMW Model: A New Framework for Teaching Monetary Economics," Journal of Economic Education, Taylor and Francis Journals, vol. 37(1), pages 98-117, January.
- Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo & Hülsewig, Oliver & Schmidt, Robert, 2002. "The BMW model: A new framework for teaching monetary macroeconomics in closed and open economies," W.E.P. - WÃ¼rzburg Economic Papers 34, University of Würzburg, Chair for Monetary Policy and International Economics.
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