A Simple Wicksellian Macroeconomic Model

Abstract

This paper describes a simple Wicksellian macroeconomic model that can be used in undergraduate macroeconomics courses. It is designed as an alternative to the Romer (2000) model that is slowly replacing IS-LM/AS-AD in many textbooks. The chief advantages of the Wicksellian model over the Romer model are that it accounts for the term structure of interest rates, and it uses the federal funds rate as a freely-determined monetary policy instrument rather than imposing a monetary policy rule. The model can be used to analyze a number of interesting issues in monetary policy that are difficult to handle in the IS-LM/AS-AD or Romer model framework involving permanent versus temporary expenditures shocks, anticipated expenditures shocks, and shocks to the term structure of interest rates. The model can easily be simplified for use in a principles course or extended for use in upper-level macroeconomics courses.