As stated before, the three-equations model synthetically presented in the previous chapter, is intended to be many things with the obvious aim of being a less obsolete framework to represent modern policy choices than the venerable IS-LM. That is, however, not the only aim, because the other obvious one is to be a pedagogically accessible, diagrammatic representation of the model most central banks and treasury departments use for their forecasting. This model is known as the dynamic stochastic general equilibrium one (DSGE), but also sometimes as the “consensus model” because it represents a way in which the great disagreement in macroeconomic modelling originating from the 1980s came to a consensus representation in that the main structure of the real business cycle agenda (also known as fresh-water economics as it is mainly associated with the universities on the great lakes of the United States) was paired with key insights originating from New Keynesian economics (also known as salt-water economics as it is mainly associated with the universities on the two coasts of the United States). There are many versions of the DSGE and therefore any generalization on this is bound to be easily disproven, but very superficially the model is often summarized into three basic equations. These are:

• 1. An interest rate rule (or Taylor rule) that describes the behaviour of the policymaker which is obviously the equivalent of the monetary rule of the previous chapter.

• 2. A demand-side equation sometimes described as a New Keynesian IS curve (which is obviously meant to match the IS curve of the previous chapter).

• 3. A supply-side equation of different and varied specification that may take the form of the New Keynesian Phillips curve whose function is performed by the inertiaaugmented Phillips curve of the previous chapter.

Again very superficially, because there are three equations matched by another three, it would be easy to claim that the two models must be pretty much interchangeable. That is, however, not true the moment one digs deeper into how the three relationships are justified in the two models. The task of the present and following chapter is therefore to explore what lies behind the three equations presented in the previous one, and understand the extent to which they actually depart from the corresponding ones of the DSGE they so superficially match.