Teaching Modern Macroeconomics in the Mundell-Fleming Language: The IS-MPR-UIP-AD-AS Model
he traditional open aggregate demand and aggregate supply model backed by the Mundell-Fleming model, together with the supply curve that relates the price level to the output gap, should be abandoned in undergraduate Macroeconomics teaching. First, because economies do not return automatically to equilibrium; second, modern central banks set the interest rate, not the amount of money; and third, the main variable of interest is inflation, not price level.
The New Keynesian models taught in intermediate macroeconomics have raised these questions, and had been expected to replace the traditional model. However, they lack its appeal and simplicity. At present, the Mundell-Fleming model, on the verge of turning 60, remains a fundamental part of undergraduate-level macroeconomics textbooks.
In this article we present an alternative, the IS-MPR-UIP-AD-AS, a simple New Keynesian model and a form of the Mundell-Fleming with inflation targeting that determines the equilibrium values of production, inflation, the real interest rate, and the real exchange rate. The model is as simple as the traditional one in that it replicates the general equilibrium scheme, it contains a reasonable measure of mathematics and graphical treatment, and it has a simple connection between predictions and facts; but it is also useful in analyzing the main questions of interest. In addition, and more importantly, the device is as flexible as the traditional one, so it can be extended to deal with more complex matters.
The main objective is that this model replace the traditional Mundell-Fleming in the teaching of macroeconomics at the undergraduate level.
Teaching macroeconomics, Inflation Targeting Scheme, Mundell-Fleming Model, Open-Economy New Keynesian Model, monetary policy rule
E32, E52, E58