Abstract for:The Canonical New Keynesian Monetary Policy Model: A System Dynamics Translation
Our purpose in this paper is to make accessible to the system dynamics community a simplified version of the workhorse monetary policy model of many central banks: the New Keynesian Monetary Policy Model (NKMP). Specifically, we translate into system dynamics (SD) modeling language the well-known 3-equation, canonical version of the NKMP. Of course, even the canonical version in daily use actually contains 30 or 40 equations, but being able to summarize a useful mid-size model in such a compact way has great appeal to policy makers. Our contribution is to add stock-and-flow structure and emphasize the significance of delays inherent in stock-adjustment processes in real-world systems represented by such models, while retaining simplicity and improving transparency. A prerequisite for SD-based monetary policy models to be taken seriously by central bank economists is a good-faith effort to communicate with them on their terms, and a SD translation of models (theories) currently used by those economists is a good place to start. Our long run goal is to demonstrate the value added to their theories by an SD approach and reach a position to be able to suggest extensions and modifications to those theories.