Keynesian Models: The IS and LM Curves, the Taylor Rule, and the Phillips Curve

This chapter presents three equations from Keynesian models: (i) the IS curve, which relates the real interest rate and real output; (ii) the LM curve, which relates the nominal interest rate and the quantity of money; (iii) and the Phillips curve, which relates the unemployment rate (or output gap) and the inflation rate. Each of these equations is specified from two approaches. From the traditional Keynesian viewpoint, the equations are grounded on behavioral rules. From the new Keynesian approach, the specifications are based on microeconomics. The two approaches produce not only distinct specifications but also different predictions that can be tested empirically.