However an upward sloping relation of the kind shown

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Unformatted text preview: rve becomes simply the Hicksian LM curve. However, an upward-sloping relation of the kind shown in the figure will exist under many other hypotheses, including ones more descriptive of actual central bank behavior than the Hicksian construct. On the relation between IS–MP analysis and the older IS–LM analysis, see, for example, Romer (2000) in this journal. 4 Alternatively, one can substitute the inflation rate implied by the Phillips curve (for a given level of output) into the central bank reaction function, and plot the resulting relation for i as a function of Y as the curve MP. In this case, MP slopes upward, as shown, even if the central bank’s reaction function responds only to inflation; and the equilibrium shown in Figure 2B already takes account of the endogeneity of the inflation rate. Financial Intermediation and Macroeconomic Analysis 29 Introducing Multiple Interest Rates Here Here I illustrate one way to introduce multiple interest rates into this model. Suppose that instead of directly lending to ultimate borrowers themselves, savers fund intermediaries, who use these funds to lend to (or acqui...
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