Lecture 6: IS-LM (2)Monetary PolicyEquilibrium in M rather than Central Bank MLMISSlide 6IS-LM ModelEpisodesDynamicsFactsLecture 6: IS-LM (2)•Review: Find equilibrium in goods and financial markets (Y,i). Monetary and fiscal policy •Episodes•Some dynamics•FactsMonetary PolicyiMoneyMMsMdMs’Equilibrium in M rather than Central Bank MMs = H c + (1-c)Ms = Md => H 1 = P Y L(i) c + (1-c)Examples: a) Y2k ; b) Prudence; c) OMO with multiplierLM**LMYMiiMd(Y0)Md(Y1)Y0Y1i0i1A) Expansionary Monetary Policy; B) Y2kISOLD: Y = C(Y-T) + I + G I = I(Y,i) + -IS: Y = C(Y-T) + I(Y,i) + GWhy IS?ISISYY0 Y1i1i0Z(i1)Z(i0)A) Fiscal Policy; B) “Optimism”IS-LM ModelYiISLMA) Fiscal policy; B) Monetary policy; C) MixEpisodes•The Clinton-Greenspan policy mix•German unificationDynamics Yi LM’ Monetary Contraction LMIS SLOW GOODS MARKET / FAST FINANCIAL MARKETSFacts•Insert Figure 5.11•Insert Table
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