Editing New Keynesian economics (section)

====Science of monetary policy====

The ideas developed in the 1990s were put together to develop the new Keynesian [[dynamic stochastic general equilibrium]] used to analyze monetary policy. This culminated in the three-equation new Keynesian model found in the survey by [[Richard Clarida]], [[Jordi Gali]], and [[Mark Gertler (economist)|Mark Gertler]] in the ''[[Journal of Economic Literature]]''.<ref>Clarida, Galí, and Gertler (2000)</ref><ref>{{cite journal |last1=Clarida |first1=Richard |last2=Galí |first2=Jordi |last3=Gertler |first3=Mark |year=2000 |title=Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory |journal=[[The Quarterly Journal of Economics]] |volume=115 |issue=1 |pages=147–180 |doi=10.1162/003355300554692 |citeseerx=10.1.1.111.7984 |s2cid=5448436 }}</ref> It combines the two equations of the new Keynesian Phillips curve and the Taylor rule with the ''dynamic IS curve'' derived from the optimal [[Random walk model of consumption|dynamic consumption equation]] (household's Euler equation).

<math display="block">y_{t}=E_{t} y_{t+1} - \frac{1}{\sigma}(i_{t} - E_{t}\pi_{t+1})+v_{t}</math>

These three equations formed a relatively simple model which could be used for the theoretical analysis of policy issues. However, the model was oversimplified in some respects (for example, there is no capital or investment). Also, it does not perform well empirically.