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The 3-Equation New Keynesian Model - A Graphical Exposition

Carlin, W; Soskice, D; (2005) The 3-Equation New Keynesian Model - A Graphical Exposition. Contributions to Macroeconomics , 5 (1) pp. 1-36. Green open access


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We develop a graphical 3-equation New Keynesian model for macroeconomic analysis to replace the traditional IS-LM-AS model. The new graphical IS-PC-MR model is a simple version of the one commonly used by central banks and captures the forward-looking thinking engaged in by the policy maker. Within a common framework, we compare our model to other monetary-rule based models that are used for teaching and policy analysis. We show that the differences among the models centre on whether the central bank optimizes and on the lag structure in the IS and Phillips curve equations. We highlight the analytical and pedagogical advantages of our preferred model. The model can be used to analyze the consequences of a wide range of macroeconomic shocks, to identify the structural determinants of the coefficients of a Taylor type interest rate rule, and to explain the origin and size of inflation bias.

Type: Article
Title: The 3-Equation New Keynesian Model - A Graphical Exposition
Open access status: An open access version is available from UCL Discovery
Keywords: New Keynesian macroeconomics, monetary policy rule, Taylor rule, 3-equation model, inflation bias, time inconsistency
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH
URI: http://discovery.ucl.ac.uk/id/eprint/16060
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