A Simple Wicksellian Macroeconomic Model

This paper describes a simple Wicksellian macroeconomic model that can be used in undergraduate macroeconomics courses. It is designed as an alternative to the Romer (2000) model that is slowly replacing IS-LM/AS-AD in many textbooks. The Wicksellian model has four desirable features relative to the Romer model. First, it treats the interest rate as an exogenous monetary policy instrument rather than assuming that the central bank follows a monetary policy rule. Second, the model can be used to derive a monetary policy rule that is consistent with optimizing behavior on the part of the central bank. Third, the model includes a term structure equation. Fourth, the model has a simple recursive structure that makes it easy to work with. The model can be used to analyze a number of interesting issues in monetary policy that are difficult to handle in the IS-LM/AS-AD or Romer model frameworks. These include issues involving permanent versus temporary expenditures shocks, anticipated expenditures shocks, and shocks to the term structure of interest rates. The model can easily be simplified for use in a principles course or extended for use in upper-level macroeconomics courses.