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Keynes’s Dynamic ISLM versus Taylor’s Rule
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The present paper suggests that the logic of ISLM, as understood by Keynes, permits a dynamic version of it. The latter can illustrate a short run that can capture growth prospect facing it. This understanding shows that growth prospects define the monetary prospects that in turn determine the rate of interest, as a monetary phenomenon. The comovement of interest rate and prices is a response to growth prospects, and the former plays the signaling device to indicate the growth prospects facing the current period. The broader conclusion is monetary policy should play a passive role and align the rate of interest to actual growth prospects; the policy focus is on the management of the growth prospects
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