Sunday, October 11, 2009: 10:20 AM
New Keynesian DSGE models propose a new version of the old
IS-LM paradigm. Acknowledging that the Taylor rule as a substi-
tute for the LM-curve has its merits we show that typically DSGE
approaches do not model explicitly how the central bank achieves its
targets. In …filling this gap we make evident that models neglecting a
store-of-value-function of money but still assuming a Taylor rule are
inconsistent. Our major point concerns the so-called new Keynesian
IS-curve. We prove that DSGE models which typically rest on the
assumption of representative agents are unable to derive the IS-curve
which implies that the role of savings as generating a gap of aggre-
gate demand cannot be investigated in these approaches. By assuming
overlapping generations models we make evident how this shortcoming can be
avoided.
IS-LM paradigm. Acknowledging that the Taylor rule as a substi-
tute for the LM-curve has its merits we show that typically DSGE
approaches do not model explicitly how the central bank achieves its
targets. In …filling this gap we make evident that models neglecting a
store-of-value-function of money but still assuming a Taylor rule are
inconsistent. Our major point concerns the so-called new Keynesian
IS-curve. We prove that DSGE models which typically rest on the
assumption of representative agents are unable to derive the IS-curve
which implies that the role of savings as generating a gap of aggre-
gate demand cannot be investigated in these approaches. By assuming
overlapping generations models we make evident how this shortcoming can be
avoided.