Modifying the Taylor-Romer Model of Macroeconomic Stabilisation for Teaching Purposes

It is becoming increasingly recognised that the IS-LM-AS model is no longer the best pedagogic tool for describing the way monetary policy works in most industrialised countries. Emerging in its place is the TaylorRomer (TR) model of macroeconomic stabilisation, in which the central bank adopts an interest rate rule. The TR model has the twin advantages of being more realistic and simpler than the traditional IS-LM-AS model. This article argues that the goals of realism and simplicity can be further advanced with some refinement of the TR model. Several minor modifications are advocated. An additional change is proposed to the diagram so as to reflect better the actual adjustment paths that are likely to be observed following demand and supply shocks. This paper also shows how these adjustment paths can be easily simulated by students using standard spreadsheet software.