A Dynamic IS-LM Model with Adaptive Expectations
No 15, Advances in Economic and Financial Research - DOFIN Working Paper Series from Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB
We analyze the stability of a discrete-time dynamic model with an IS-LM structure. We assume that the Aggregate Supply function is of Lucas type, and the monetary policy rule is of Friedman type. The mechanism of expectations formation is assumed to be of adaptive type (Friedman-Cagan). In its final form, the model contains two state variables, namely money supply and expected inflation. From the mathematical point of view, it is an affine discrete-time system, whose stability properties are analyzed in the paper. We deduce sufficient conditions concerning the "learning coefficient" involved in the Friedman-Cagan type of forecast equation, so that the model is stable.
Keywords: steady state; Lucas type AS function; Friedman type monetary policy rule; stability conditions (search for similar items in EconPapers)
JEL-codes: A10 C02 D50 E00 E12 E30 (search for similar items in EconPapers)
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