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

Abstract

This chapter presents three equations from Keynesian models: (i) the IS curve, which relates to the real interest rate and real output; (ii) the LM curve, which relates to the nominal interest rate and the quantity of money; (iii) and the Phillips curve, which relates to 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.