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What Happens behind the New Keynesian IS? Technical Notes

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  • Roberto Tamborini

Abstract

The aim of these notes is to point out and address a few technical problems concerning the so-called «IS» equation in the New Keynesian macroeconomic model. First, in the basic NK model with sole consumption, the consumption function is not properly derived from first principles (the intertemporal budget constraint is missing), and when it is, the IS as locus of aggregate demand-supply equality may not exist. Second, when investment is introduced, and the investment-saving equalization mechanism is properly worked out, the resulting IS locus is different from the NK one, with different dynamic properties and different implications for interest-rate control. In particular, the paper shows that a simple linear feed-back rule with respect to output gaps is necessary and sufficient to drive the economy to the «zero-gaps» steady state. Yet the dynamic path of output becomes (endogenously) oscillatory. It is also shown that the same implications arise for inflation control too.

Suggested Citation

  • Roberto Tamborini, 2014. "What Happens behind the New Keynesian IS? Technical Notes," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 203-226.
    • Handle: RePEc:mul:jqat1f:doi:10.1427/77082:y:2014:i:2:p:203-226
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    Cited by:

    1. Francesco Saraceno & Roberto Tamborini, 2015. "How can it work? On the impact of quantitative easing in the Eurozone," DEM Working Papers 2015/03, Department of Economics and Management.
    2. repec:hal:spmain:info:hdl:2441/4ei7u710bj9par121c71ul9fdr is not listed on IDEAS
    3. Francesco Saraceno & Roberto Tamborini, 2015. "How can it work? On the impact of quantitative easing in the Eurozone," DEM Working Papers 2015/03, Department of Economics and Management.
    4. repec:hal:spmain:info:hdl:2441/4ppcskgnsc8tmbhdrupis355j7 is not listed on IDEAS

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