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Equilibrium income and monetary policy strategy: teaching macroeconomics with the MP curve

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  • Canale, Rosaria Rita

Abstract

The aim of the paper is to present a derivation of a simple tool describing monetary policy behaviour, useful to teach macroeconomic policies in open economies, the MP curve. The objective is to overcome the limits of the standard IS-LM model and underline the importance of the central bank strategy in influencing output and employment. We demonstrate that if the main policy instrument is the interest rate, the monetary policy authorities have very great influence in determining macroeconomic equilibrium. In fact the monetary policy strategy - of which the MP curve is the representation - is able to create, once given the dynamic supply curve and the IS curve, different levels of income in accordance to the inflation target, or different levels of inflation in accordance to the income target. Furthermore - because the nature and form of the MP curve depends both on constraints and targets the monetary policy considers and they might not be correctly interpreted - the central bank could assume a misleading behaviour, guiding the economic system toward a level of activity, not consistent with full employment and price stability

Suggested Citation

  • Canale, Rosaria Rita, 2008. "Equilibrium income and monetary policy strategy: teaching macroeconomics with the MP curve," MPRA Paper 12255, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:12255
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    References listed on IDEAS

    as
    1. Carl E. Walsh, 2002. "Teaching Inflation Targeting: An Analysis for Intermediate Macro," The Journal of Economic Education, Taylor & Francis Journals, vol. 33(4), pages 333-346, December.
    2. Peter Bofinger & Eric Mayer & Timo Wollmershäuser, 2006. "The BMW Model: A New Framework for Teaching Monetary Economics," The Journal of Economic Education, Taylor & Francis Journals, vol. 37(1), pages 98-117, January.
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    More about this item

    Keywords

    teaching intermidiate macroeconomics; monetary policy strategy; equilibrium income;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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