Lecture 6: IS-LM (2) Review: Find equilibrium in goods and financial markets (Y,i). Monetary and fiscal policy Episodes Some dynamics Facts.

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Presentation transcript:

Lecture 6: IS-LM (2) Review: Find equilibrium in goods and financial markets (Y,i). Monetary and fiscal policy Episodes Some dynamics Facts

Monetary Policy i Money M M s M d M s’

Equilibrium in M rather than Central Bank M Ms = H c +  (1-c) Ms = Md => H 1 = P Y L(i) c +  (1-c) Examples: a) Y2k ; b) Prudence; c) OMO with multiplier

LM * * Y M i i Md(Y0) Md(Y1) Y0 Y1 i0 i1 A) Expansionary Monetary Policy; B) Y2k

IS OLD: Y = C(Y-T) + I + G I = I(Y,i) + - IS: Y = C(Y-T) + I(Y,i) + G Why IS?

IS Y Y0Y1 i1 i0 Z(i1) Z(i0) A) Fiscal Policy; B) “Optimism”

IS-LM Model Y i IS LM A) Fiscal policy; B) Monetary policy; C) Mix

Episodes The Clinton-Greenspan policy mix German unification

Dynamics Y iLM’ Monetary Contraction LM IS SLOW GOODS MARKET / FAST FINANCIAL MARKETS

Facts Insert Figure 5.11 Insert Table 5.1

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