The BMW Model: A New Framework for Teaching Monetary Economics

Bofinger, Peter; Mayer, Eric; Wollmershäuser, Timo

doi:10.3200/jece.37.1.98-117

Cited by 43 publications

(26 citation statements)

References 13 publications

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“…Following Walsh (2002) and Bofinger (2008and Bofinger et al 2002and 2006, the IS-MP model considers through the supply curve also the labour market dynamics. Finally following Romer contribution (2000 and2005), this it considers the central bank practice of setting the interest rates instead of the quantity of money.…”

Section: Discussionmentioning

confidence: 99%

“…As Colander (1995) says "if supply and demand are independent the standard disequilibrium analysis do not lead to a unique equilibrium with anything less than instantaneous price level adjustment" 2 . This happens because -briefly summarizing what authoritative authors have underlined -the IS-LM model does not include in its analysis the inflation rate and labour market dynamics (see for example Walsh 2002and Bofinger et al 2006e Bofinger 2008. Further limits have raised from the working of modern economies in which money cannot be directly controlled by monetary policy authorities, because banking and financial systems can create or destroy payment instruments each time a central bank conducts a restrictive or expansive monetary policy respectively.…”

Section: Introductionmentioning

confidence: 99%

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Equilibrium Income and Monetary Policy Strategy: Teaching Macroeconomics with the MP Curve

Canale

2008

SSRN Journal

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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. JEL classification: A20, E58, E61 ♣ Dipartimento di "Studi Economici" -University of Naples "Parthenope" Via Medina 40-80133 -Naples -Italy e-mail: canale@unina.it; rorita.canale@uniparthenope.it 2 EQUILIBRIUM INCOME AND MONETARY POLICY STRATEGY : TEACHING MACROECONOMICS WITH THE MP CURVE AbstractThe 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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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Equilibrium Income and Monetary Policy Strategy: Teaching Macroeconomics with the MP Curve

Canale

2008

SSRN Journal

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“…Expectations regarding future inflation are assumed to 6 The assumption here that the risk-premium is equal to 0 at the steady-state is without loss of generality. 7 The expectations term on the right-hand-side of the Phillips curve, which is past expectations of current inflation, follows Mankiw [1].…”

Section: The Dad-das Modelmentioning

confidence: 99%

“…Jones [4]; Mankiw [1]; Mishkin [5]). The change in the treatment of business cycles found in textbooks has paralleled a burgeoning pedagogical literature that presents alternatives to the traditional Keynesian IS-LM/AD-AS framework that are suitable for undergraduates (Bofinger, Mayer, Wollmershäuser [6]; Carlin and Soskice [7]; Kapinos [8]; Romer [9]; Weerapana [10]; Weisse [11]). These developments have brought the undergraduate treatment of business cycle fluctuations much closer to the research frontier where monetary policy is modeled as an interest rate rule and the analysis is undertaken in * The views expressed in this paper are solely those of the authors.…”

Section: Introductionmentioning

confidence: 99%

Extending the Textbook Dynamic AD-AS Framework with Flexible Inflation Expectations, Optimal Policy Response to Demand Changes, and the Zero-Bound on the Nominal Interest Rate

Alpanda¹,

Honig²,

Woglom³

2013

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Many popular macroeconomics textbooks have recently adopted the dynamic aggregate demand-aggregate supply framework to analyze business cycle fluctuations and the effects of monetary policy. This brings the textbook treatment much closer to the research frontier, although a major remaining difference is the treatment of inflation expectations. Textbook treatments typically assume adaptive expectations for tractability. In this paper, we extend the model presented in Mankiw [1] by incorporating a more flexible form of expectation formation that is determined as a weighted average of past inflation and the inflation target. This brings the treatment closer to rational expectations and allows for a discussion of costless disinflation. Monetary policy is assumed to follow a Taylor rule, but we allow for deviations from the rule to motivate a discussion regarding optimal monetary policy response to demand shocks. We also include a shock to the risk-premium on the interest rate relevant for demand relative to the policy rate set by the Central Bank, and impose the zero-bound on the nominal interest rate in the solution of the model. These features allow for the analysis of the recent financial crisis, monetary policy falling into a liquidity trap, and the desirability of a temporary increase in the inflation target. Finally, we make available an Excel sheet with which students can analyze the effect of shocks to the economy using impulse responses and dynamic aggregate demand-aggregate supply diagrams.

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“…Following Bofinger, Mayer, and Wollmershäuser [2006] and Poutineau and Vermandel [2015b] we neglect the dynamic aspects of the model and we concentrate on a static version of the framework.…”

Section: The Solution To a Static Version Of The Modelmentioning

confidence: 99%

The Analytics of the New Keynesian 3-equation Model

Poutineau¹,

Sobczak²,

Vermandel³

2015

EBR

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International trade in di erentiated goods, nancial crisis and the gravity equation Udo Broll, Julia Jauer Tax revenues and aging in ex-communist EU countries Review, Vol. 1 (15), No. 2, 2015: 110-129 DOI: 10.18559/ebr.2015 The analytics of the New Keynesian Abstract : This paper aims at providing a self contained presentation of the ideas and solution procedure of New Keynesian Macroeconomics models. Using the benchmark "3 equation model", we introduce the reader to an intuitive, static version of the model before incorporating more technical aspects associated with the dynamic nature of the model. We then discuss the relative contribution of supply, demand and policy shocks to the fluctuations of activity, inflation and interest rate, depending on the key underlying parameters of the economy.

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The BMW Model: A New Framework for Teaching Monetary Economics

Cited by 43 publications

References 13 publications

Equilibrium Income and Monetary Policy Strategy: Teaching Macroeconomics with the MP Curve

Equilibrium Income and Monetary Policy Strategy: Teaching Macroeconomics with the MP Curve

Extending the Textbook Dynamic AD-AS Framework with Flexible Inflation Expectations, Optimal Policy Response to Demand Changes, and the Zero-Bound on the Nominal Interest Rate

The Analytics of the New Keynesian 3-equation Model

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