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Keynesian macroeconomics without the LM curve: IS-MP-IA model and Taylor rule applied to some CESEE economies

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  • Josheski, Dushko

Abstract

Applying IS-MP-IA model and the Taylor rule, this study finds that for selected CESEE economies (Albania, Bosnia and Herzegovina, Macedonia and Serbia), lower expected inflation rate, real exchange rate appreciation, a lower world interest rate which is calculated like a federal funds rate minus inflation in US, and more world output would help to increase output of the selected economies in the sample. A lower ratio of government consumption spending to GDP would also increase the output of the selected economies. Hence, fiscal prudence is needed, and the conventional approach of real depreciation to stimulate exports and raise real output does not apply to the selected CESEE economies. When private household consumption is in the model the coefficient on government spending to nominal GDP is insignificant implying that Ricardian equivalence does hold for the selected countries. These results are robust because they are controlled in the period of four decades from 1969 to 2013. Study uses 4 decadal dummies that control for each decade.

Suggested Citation

  • Josheski, Dushko, 2014. "Keynesian macroeconomics without the LM curve: IS-MP-IA model and Taylor rule applied to some CESEE economies," MPRA Paper 53832, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:53832
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    References listed on IDEAS

    as
    1. William Nordhaus, 2005. "The Sources of the Productivity Rebound and the Manufacturing Employment Puzzle," NBER Working Papers 11354, National Bureau of Economic Research, Inc.
    2. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
    3. Shijaku, Gerti & Gjokuta, Arlind, 2013. "Fiscal policy and economic growth: the case of Albania," MPRA Paper 79090, University Library of Munich, Germany.
    4. Fatmir Besimi, 2004. "The Role of the Exchange Rate Stability in a Small and Open Economy: The Case of the Republic of Macedonia," Working Papers 2004-01, National Bank of the Republic of North Macedonia.
    5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    More about this item

    Keywords

    IS-MP-IA; Taylor Rule; Inflation targeting; monetary policy function; government spending to nominal GDP; world interest rates;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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