Blanchard's "new approach": the IS–LM–PC model

In the latest editions of his macroeconomics textbook, Olivier Blanchard abandons the traditional AS-AD mainstream model. He writes that the traditional model was "cumbersome and gave too optimistic a view of the return of output to potential". In this Chapter, we present the pivotal features of Blanchard's new approach, which he calls IS-LM-PC. Most notably, we discuss how the new IS-LM-PC model is grounded on many of the fundamental theses of the previous AS-AD model, such as the existence of a "natural equilibrium" which is independent from effective demand and from the distributive conflict between social classes, and the thesis that, in almost any case, it is possible to resort uniquely to central bank's monetary policy to guarantee the convergence of the economic system towards the equilibrium. Thus, we show that, with few exceptions, the economic policy implications of the new approach are in fact similar to those of the traditional AS-AD model.