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Equilibrium income and monetary policy strategy: teaching macroeconomics with the MP curve

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  • Canale, Rosaria Rita

Abstract

The 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12255.

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Date of creation: 18 Dec 2008
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Handle: RePEc:pra:mprapa:12255

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Keywords: teaching intermidiate macroeconomics; monetary policy strategy; equilibrium income;

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  1. 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. - Würzburg Economic Papers, University of Würzburg, Chair for Monetary Policy and International Economics 34, University of Würzburg, Chair for Monetary Policy and International Economics.
  2. Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo, 2006. "The BMW model: A new framework for teaching monetary economics," Munich Reprints in Economics, University of Munich, Department of Economics 20214, University of Munich, Department of Economics.
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