The BMW Model: Simple Macroeconomics for Closed and Open Economies - A Requiem for the IS/LM-AS/AD and the Mundell-Fleming Mode

Peter Bofinger, Wollmershäuser, Timo and Eric Mayer
Authors registered in the RePEc Author Service: Timo Wollmershäuser

No 3980, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: While the IS/LM-AS/AD model is still the central tool of macroeconomic teaching it has been criticised by several economists. The model is unable to deal with a monetary policy that uses the interest rate as its operating target (Romer [2000]). Walsh [2002] has criticised that it is not suited for an analysis of inflation targeting. We present the BMW model as an alternative framework, which develops the Romer approach into a simple macroeconomic model. It can deal with issues like inflation targeting, monetary policy rules, and central bank credibility. Our open-economy version is a powerful alternative to the IS/LM-based Mundell-Fleming (MF) model. The main advantage of the open-economy BMW model is its ability to discuss the role of inflation and the determination of flexible exchange rates while the MF model is based on fixed prices and constant exchange rates.

Keywords: A20; Monetary policy; Inflation targeting; Optimal interest rate rules; Simple rules; Is/lm; Mundell-fleming (search for similar items in EconPapers)
JEL-codes: E10 E50 F41 (search for similar items in EconPapers)
Date: 2003-07
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Working Paper: The BMW model: Simple macroeconomics for closed and open economies a requiem for the IS/LM-AS/AD and the Mundell-Fleming model (2002)
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