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The BMW model: A new framework for teaching monetary macroeconomics in closed and open economies

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  • Bofinger, Peter
  • Mayer, Eric
  • Wollmershäuser, Timo
  • Hülsewig, Oliver

Abstract

While the IS/LM-AS/AD model is still the central tool of macroeconomic teaching it has been criticised by several economists. The model is unable to deal with a monetary policy that uses the interest rate as its operating target ( Romer [2000]). Walsh [2002] has criticised that it is not suited for an analysis of inflation targeting. We present the BMW model as an alternative framework, which develops the Romer approach into a simple macroeconomic model. It can deal with issues like inflation targeting, monetary policy rules, and central bank credibility. Our open-economy version is 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.

Suggested Citation

  • Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo & Hülsewig, Oliver, 2003. "The BMW model: A new framework for teaching monetary macroeconomics in closed and open economies," W.E.P. - Würzburg Economic Papers 34, University of Würzburg, Chair for Monetary Policy and International Economics.
  • Handle: RePEc:zbw:wuewep:34
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    References listed on IDEAS

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    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    2. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
    3. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    4. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
    5. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters,in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
    6. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    7. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
    8. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics.
    9. Carl E. Walsh, 2002. "Teaching Inflation Targeting: An Analysis for Intermediate Macro," The Journal of Economic Education, Taylor & Francis Journals, vol. 33(4), pages 333-346, December.
    10. Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo, 2002. "The BMW model: simple macroeconomics for closed and open economies a requiem for the IS/LM-AS/AD and the Mundell-Fleming model," W.E.P. - Würzburg Economic Papers 35, University of Würzburg, Chair for Monetary Policy and International Economics.
    11. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
    12. David Colander, 1995. "The Stories We Tell: A Reconsideration of AS/AD Analysis," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 169-188, Summer.
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    Citations

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    Cited by:

    1. Peter Bofinger & Eric Mayer, 2007. "Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve," Open Economies Review, Springer, vol. 18(3), pages 291-305, July.
    2. Peter Bofinger & Eric Mayer & Timo Wollmershäuser, 2009. "Teaching New Keynesian Open Economy Macroeconomics at the Intermediate Level," The Journal of Economic Education, Taylor & Francis Journals, vol. 40(1), pages 80-102, January.
    3. Canale, Rosaria Rita, 2008. "Equilibrium income and monetary policy strategy: teaching macroeconomics with the MP curve," MPRA Paper 12255, University Library of Munich, Germany.
    4. Canale, Rosaria Rita, 2006. "Positive effects of fiscal expansions on growth and debt," MPRA Paper 1432, University Library of Munich, Germany, revised Nov 2006.
    5. Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo, 2002. "The BMW model: simple macroeconomics for closed and open economies a requiem for the IS/LM-AS/AD and the Mundell-Fleming model," W.E.P. - Würzburg Economic Papers 35, University of Würzburg, Chair for Monetary Policy and International Economics.
    6. Pavel S. Kapinos, 2010. "A New Keynesian Workbook," International Review of Economic Education, Economics Network, University of Bristol, vol. 9(1), pages 111-123.

    More about this item

    Keywords

    monetary policy; inflation targeting; optimal interest rate rules; simple rules; managed floating; IS/LM; Mundell-Fleming;

    JEL classification:

    • A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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