1) Yt - Yt* = -B (rt - rt*) + nt

  • r*t = RBC real interest rate
  • difference between r and r* tell difference between Yt and Yt* (plus some stochastic demand shock)
  • this is the IS curve (?)

2) It = It-1 + a(Yt - Yt*) + et

  • I = inflation (don't know how to do pi)
  • et is a supply side price shock (like oil)
  • this is the Phillips curve

3) rt = 2% + 0.5(It-1 - 2%) + 0.5(Yt-1 - Yt-1*) + et

  • et in this case might be an interest rate shock

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