The BMW model: simple macroeconomics for closed and open economies a requiem for the IS/LM-AS/AD and the Mundell-Fleming model
AbstractWhile the IS/LM-AS/AD model is still the central tool of macroeconomic teaching in most macroeconomic textbooks, it has been criticised by several economists. Colander  has demonstrated that the framework is logically inconsistent, Romer  has shown that it is unable to deal with a monetary policy that uses the interest rate as its operating target, Walsh  has criticised that it is not well suited for an analysis of inflation targeting. In our paper we start with a short discussion of the main flaws of the IS/LM-AS/AD model. We present the BMW model as an alternative framework, which develops the Romer approach into a very simple, but comprehensive macroeconomic model. In spite of its simplicity it can deal with issues like inflation targeting, monetary policy rules, and central bank credibility. We extend the model to an open-economy version as a powerful alternative to the IS/LM-based Mundell-Fleming (MF) model. The main advantage of the open-economy BMW model is its ability to discuss the role of inflation and the determination of flexible exchange rates while the MF model is based on fixed prices and constant exchange rates. This working paper is an extended and more theoretical version of Würzburg Economic Paper No. 34. Besides describing the derivation of optimal interest rate rules and the concept of loss functions more in detail, it also discusses simple interest rate rules in an open economy as well as a strategy of managed floating within the same theoretical framework. Additionally, we explore the stabilizing properties of simple interest rate rules. --
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Bibliographic InfoPaper provided by University of Würzburg, Chair for Monetary Policy and International Economics in its series W.E.P. - Würzburg Economic Papers with number 35.
Date of creation: 2002
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More information through EDIRC
monetary policy; inflation targeting; optimal interest rate rules; simple rules; managed floating; IS/LM; Mundell-Fleming;
Find related papers by JEL classification:
- A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
- E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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.:
- 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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- Bofinger, Peter & Mayer, Eric, 2004. "Monetary and Fiscal policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve," CEPR Discussion Papers 4790, C.E.P.R. Discussion Papers.
- Bofinger, Peter & Mayer, Eric, 2003. "Monetary and fiscal policy interaction in the Euro area with different assumptions on the Phillips curve," W.E.P. - WÃ¼rzburg Economic Papers 40, University of Würzburg, Chair for Monetary Policy and International Economics.
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