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The BMW model: A new framework for teaching monetary macroeconomics in closed and open economies

Peter Bofinger (), Eric Mayer (), Timo Wollmershäuser () and Oliver Hülsewig

No 34, W.E.P. - Würzburg Economic Papers from University of Würzburg, Chair for Monetary Policy and International Economics

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: monetary policy; inflation targeting; optimal interest rate rules; simple rules; managed floating; IS/LM; Mundell-Fleming (search for similar items in EconPapers)
JEL-codes: A20 E10 E50 F41 (search for similar items in EconPapers)
Date: 2003
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