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Rethinking the IS in IS-LM: adapting Keynesian tools to non-Keynesian economies Part 2

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  • Evan F. Koenig

Abstract

The IS-LM diagram was developed as a tool for analyzing Keynesian economies-economies with sticky prices and myopic households. In Part 1 of this article, Evan Koenig showed how a graphical apparatus similar to the traditional IS-LM diagram can be used to analyze economies with a fixed capital stock and optimizing, forward-looking households. Part 2 extends the earlier analysis to an economy with capital investment. As before, an expectations-augmented variant of the IS-LM model is found to include a popular real-business-cycle model as a special case. Thus, the IS-LM diagram has wide applicability as a pedagogical device and as a framework within which to discuss policy.

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File URL: http://www.dallasfed.org/assets/documents/research/er/1993/er9304b.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1993)
Issue (Month): Dec ()
Pages: 17-35

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Handle: RePEc:fip:fedder:y:1993:i:dec:p:17-35

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Keywords: Macroeconomics;

References

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  1. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  2. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  3. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December.
  4. Robert G. King, 1993. "Will the New Keynesian Macroeconomics Resurrect the IS-LM Model?," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 67-82, Winter.
  5. repec:fth:harver:1435 is not listed on IDEAS
  6. Andrew B. Abel & Olivier J. Blanchard, 1983. "An Intertemporal Model of Saving and Investment," NBER Working Papers 0885, National Bureau of Economic Research, Inc.
  7. Evan F. Koenig, 1993. "Rethinking the IS in IS-LM: adapting Keynesian tools to non-Keynesian economies Part 1," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Sep, pages 32-50.
  8. James Tobin, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 45-65, Winter.
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Cited by:
  1. Edward Nelson, 2003. "Money and the transmission mechanism in the optimizing IS-LM specification," Working Papers 2003-019, Federal Reserve Bank of St. Louis.
  2. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
  3. Jeffrey C. Fuhrer & Glenn D. Rudebusch, 2002. "Estimating the Euler equation for output," Working Papers 02-3, Federal Reserve Bank of Boston.
  4. Eric M. Leeper & Christopher A. Sims, 1994. "Toward a Modern Macroeconomic Model Usable for Policy Analysis," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 81-140 National Bureau of Economic Research, Inc.
  5. Miguel Casares & Bennett T. McCallum, 2000. "An Optimizing IS-LM Framework with Endogenous Investment," NBER Working Papers 7908, National Bureau of Economic Research, Inc.

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