Teaching Modern Macroeconomics in the Traditional Language: The IS-MR-AD-AS Model

During the last two decades we have witnessed the emergence in the field of intermediate macroeconomics of an extensive literature that seeks to dismiss the traditional IS-LM-AD-AS model and replace it with the New Keynesian option. However, the efforts have not been successful, and currently most macroeconomics textbooks still rely on the traditional model, which is more than 80 years old.

In order to help break this inertia, this paper proposes the IS-MR-AD-AS model, a New Keynesian model that allows determining the equilibrium values of production, inflation and the real interest rate.

The model differs from the existing ones in two respects. Firstly, in the description of the model, in the graphic and mathematical treatment, and in the use of comparative static as a method to simulate the effects of the exogenous variables on the endogenous ones, the simplicity and elegance of the traditional IS-LM-AD-AS is replicated. Second, in spite of its simplicity, more complex issues can be dealt with, since the general model gives rise to four subsystems with which short-term equilibrium, steady-state equilibrium, transit toward steady-state equilibrium and rational expectations are addressed one at a time.

Keywords

Inflation Targeting Scheme, New Keynesian model, Monetary policy

JEL Classification

E32, E52