The Algebraic Galaxy of Simple Macroeconomic Models: A Hitchhiker’s Guide

IMF Working Papers, May 24, 2017

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The Algebraic Galaxy of Simple Macroeconomic Models: A Hitchhiker’s Guide

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Bibliographic details

• Authors: Evan C Tanner
• Published: May 24, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484300619.001

Overview and objectives

• Author: Evan C Tanner
• Date: May 24, 2017
• Series: Working Paper No. 2017/123
• Key objective: Present a bare-bones New Keynesian extension of the IS/LM model that
  • yields solutions for core macro variables—output gap, inflation, interest rate, real exchange rate misvaluation—expressed in percent, and
  • is extended to generate a corresponding set of demand-side elements—expressed in currency units.
• Communication aim: Reconcile percent-based and currency-unit metrics to aid communication and intuition, including through IS/LM-style graphs.
• Note on publication type: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Core findings and analytical contributions

• Simple macroeconomic frameworks like the IS/LM survive because they:
  • help conceptualize complex problems, and
  • provide “back of the envelope” estimates of macroeconomic outcomes.
• The paper develops algebraic solutions within a New Keynesian extension of IS/LM for:
  • output gap (percent),
  • inflation (percent),
  • interest rate (percent), and
  • real exchange rate misvaluation (percent).
• The model is extended to produce demand-side elements in currency units to provide a bridge between percent-based macro indicators and nominal demand magnitudes.
• Emphasis on transparency and pedagogy: analytical algebraic expressions are used to enhance intuition and to enable simple graphical (IS/LM-style) representations.

Methodology and model scope

• Framework: Bare-bones New Keynesian extension of IS/LM.
• Outputs: Algebraic solutions for core macro variables (percent terms) and parallel demand-side variables (currency units).
• Communication tools: IS/LM-style graphs are used to reconcile and illustrate the relationship between percent-based and currency-based metrics.

Policy relevance and implications

• Utility for policymakers and communicators:
  • Provides back-of-the-envelope algebraic tools to translate between percent deviations (e.g., output gap, inflation, exchange rate misvaluation) and currency-unit demand effects.
  • Aids intuition when assessing macroeconomic outcomes and policy trade-offs using simple graphical representations.
• Intended audience: Researchers, policymakers, and practitioners who require tractable, transparent approximations of macroeconomic relationships.

Content in this bundle

• The Algebraic Galaxy of Simple Macroeconomic Models: A Hitchhiker’s Guide, WP/17/123, May 2017
  • The Algebraic Galaxy of Simple Macroeconomic Models: A Hitchhiker’s Guide, WP/17/123, May 2017 (Markdown version)
  • The Algebraic Galaxy of Simple Macroeconomic Models: A Hitchhiker’s Guide, WP/17/123, May 2017 (PDF)