Fluctuation, Inflation, and Stabilization

This chapter introduces the equilibrium and dynamics of six fluctuation models. The first section features the Keynesian model with an IS curve, a Phillips curve, a Taylor monetary policy rule, and inflation rate inertia. The second section presents Friedman’s monetarist model that has the same equations as the former section, plus the LM curve, but a different monetary policy rule whereas the central bank controls the money supply. The third section presents the chronic inflation model with the same equations of the previous section, but now the central bank issues money to finance the public deficit. The fourth section deals with the real business cycle, whereas the fluctuations are due to technological shocks. The fifth section is the new Keynesian model, with an IS curve derived from the Euler equation, a Phillips curve à la Calvo, and a Taylor monetary policy rule. The sixth section presents the fiscal theory of the price level, with flexible prices and with sticky prices. The seventh section takes stock of the fluctuation models.