chapter  12
A macroeconometric framework for the analysis of monetary policy
Pages 32

This chapter3 employs a small-scale Keynesian integrated macromodel to evaluate the above monetary rules of central banks. Our approach is novel in the sense that we employ a consistently formulated and complete Keynesian macroeconometric framework to study monetary policy issues. The Keynesian model presented and estimated here exhibits along the lines of Flaschel et al. (1997) asset market clearing, disequilibrium in product and labor market, sluggish price and quantity adjustments, two Phillips curves for the wage and price dynamics and expectations formulation which represents a combination of adaptive and forwardlooking behavior. Moreover, as in Chiarella and Flaschel (2000a), the current chapter also includes real growth, inflationary dynamics and inventory adjustment. As to the historical tradition, on the demand side it is Keynesian, it makes use of Kaldor’s distribution theory, uses the asset market structure as in Sargent’s (1987) Keynesian model, employs Malinvaud’s (1980) investment theory, and a Metzlertype inventory adjustment process, and uses an expectations mechanism that is forward-and backward-looking.4