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.
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 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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