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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, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  2. 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.
  3. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  4. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
  7. repec:fth:harver:1435 is not listed on IDEAS
  8. Andrew B. Abel & Olivier J. Blanchard, 1982. "An Intertemporal Model of Saving and Investment," NBER Working Papers 0885, National Bureau of Economic Research, Inc.
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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. Jeffrey C. Fuhrer & Glenn D. Rudebusch, 2002. "Estimating the Euler equation for output," Working Papers 02-3, Federal Reserve Bank of Boston.
  3. 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.
  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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