In this second edition there are several additions, most notably Mishkin´s introduction of what he calls “A Dynamic Approach to Macroeconomics”. According to Mishkin (page XXXIV):
Analyzing today´s hot-button policy issues requires approaching macroeconomic theory using the models that researchers and policy makers employ. The central modelling element in Macroeconomics: Policy and Practice, Second Edition, is a powerful, dynamic aggregate demand and supply (AD/AS) model that highlights the interaction of inflation and economic activity. In this model, inflation (as opposed to the price level) is plotted on the vertical axis.
In justifying the use of the Dynamic AS/AD (DASAD) model Mishkin says, inter alia, that:
- The DASAD framework focuses on the interaction between inflation and output, which is exactly what the media and policy makers focus on. In contrast, traditional AS/AD analysis focuses on the interaction between the price level and output.
- The DASAD framework characterizes monetary policy easing or tightening as a change in the interest rate, which is exactly the way central banks conduct monetary policy…
What put me off?
His DASAD is only “partly” dynamic because in the horizontal axis you won´t find the rate of real output growth but the deviation of output from ‘potential’ (a ‘mystery’). In that sense the AD curve is not a rectangular hyperbola (see here).
If he had presented the DASAD model that way he could easily characterize monetary policy as providing nominal stability (keep AD growing along a level growth path).
And I really don´t know why he eschewed that route because in his “valedictory remarks” in his last FOMC meeting six years ago (August 5 2008) he was very clear:
What I’d like to spend some time on—because I feel this is sort of my swan song, but maybe because I’m a classy guy, I’ll call this my “valedictory remarks”—are three concerns that I have for this Committee going forward. I’m not going to be able to participate, but I have a chance now to lay them out.
The first is the real danger of focusing too much on the federal funds rate as reflecting the stance of monetary policy. This is very dangerous. I want to talk about that.
My question: Why can´t textbook writers write down what they really believe?