The Bmw Model: A New Framework for Teaching Monetary Economics

Abstract

Although the IS/LM-AS/AD model is still the central tool of macroeconomic teaching in most macroeconomic textbooks, it has been criticized by several economists. Colander demonstrated that the framework is logically inconsistent, Romer showed that it is unable to deal with a monetary policy that uses the interest rate as its operating target, Walsh criticized that it is not well suited for an analysis of inflation targeting. The authors present a framework, that develops the Romer approach into a very simple, but at the same time comprehensive macroeconomic model. In spite of its simplicity it can carry the main insights of the New Keynesian macroeconomis to an intermediate level and deal with issues like inflation targeting, monetary policy rules, and central bank credibility.

Keywords: inflation targeting, monetary policy, New Keynesian macroeconomics, optimal interest rate rules, simple rules

JEL Classification: A20, E10, E50, F41