The Bmw Model: A New Framework for Teaching Monetary Macroeconomics in Closed and Open Economies

Wuerzburg Economic Papers No. 34

38 Pages Posted: 26 Aug 2002

See all articles by Peter Bofinger

Peter Bofinger

University of Würzburg - Institute of Economics and Social Sciences

Timo Wollmershaeuser

Ifo Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences

Oliver Hülsewig

University of Applied Sciences, Munich

Robert Schmidt

University of Würzburg - Institute of Economics and Social Sciences

Date Written: July 2002

Abstract

While the IS/LM-AS/AD model is still the central tool of macroeconomic teaching in most macroeconomic textbooks, it has been criticised by several economists. Colander [1995] has demonstrated that the framework is logically inconsistent, Romer [2000] has shown that it is unable to deal with a monetary policy that uses the interest rate as its operating target, Walsh [2001] has criticised that it is not well suited for an analysis of inflation targeting. In our paper we start with a short discussion of the main flaws of the IS/LM-AS/AD model. We present the BMW model as an alternative framework, which develops the Romer approach into a very simple, but comprehensive macroeconomic model. In spite of its simplicity it can deal with issues like inflation targeting, monetary policy rules, and central bank credibility. We extend the model to an open-economy version as 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: IS/LM model, AS/AD-model, macroeconomic teaching, inflation targeting, Mundell-Fleming model, Taylor rule

JEL Classification: A2, E1, E5, F41

Suggested Citation

Bofinger, Peter and Wollmershaeuser, Timo and Mayer, Eric and Hülsewig, Oliver and Schmidt, Robert, The Bmw Model: A New Framework for Teaching Monetary Macroeconomics in Closed and Open Economies (July 2002). Wuerzburg Economic Papers No. 34, Available at SSRN: https://ssrn.com/abstract=321045 or http://dx.doi.org/10.2139/ssrn.321045

Peter Bofinger (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 944/5 (Phone)
+49 931 312 775 (Fax)

Timo Wollmershaeuser

Ifo Institute for Economic Research ( email )

Poschingerstrasse 5
Munich, 81879
Germany
+49 89 9224 1406 (Phone)
+49 89 9224 1462 (Fax)

HOME PAGE: http://www.ifo.de/link/wollmershaeuser_t.htm

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany

Oliver Hülsewig

University of Applied Sciences, Munich ( email )

Am Stadtpark 20
Munich, 81243
Germany

Robert Schmidt

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 948 (Phone)
+49 931 312 775 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
984
Abstract Views
5,219
rank
27,160
PlumX Metrics