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Rethinking the IS in IS-LM: adapting Keynesian tools to non-Keynesian economies Part 1

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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 a series of two articles, Evan Koenig shows that a graphical apparatus similar to the traditional IS-LM diagram can be used to analyze economies that have optimizing, forward-looking households. In particular, an expectations-augmented variant of IS-LM analysis is fully consistent with a popular real-business-cycle model. Thus, the IS-LM diagram has wide applicability as a pedagogical device and as a framework within which to discuss policy. ; This article deals with an economy in which the capital stock is fixed. A subsequent article will discuss how the expectations-augmented IS-LM framework developed here can be extended to an economy with capital investment.

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File URL: http://www.dallasfed.org/assets/documents/research/er/1993/er9303c.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): Sep ()
Pages: 32-50

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Handle: RePEc:fip:fedder:y:1993:i:sep:p:32-50

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Web page: http://www.dallasfed.org/
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Keywords: Macroeconomics;

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  1. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-29, November.
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Cited by:
  1. Edward Nelson, 2004. "Money and the Transmission Mechanism in the Optimizing IS-LM Specification," History of Political Economy, Duke University Press, vol. 36(5), pages 271-304, Supplemen.
  2. Evan F. Koenig, 1993. "Rethinking the IS in IS-LM: adapting Keynesian tools to non-Keynesian economies Part 2," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Dec, pages 17-35.
  3. Glenn D. Rudebusch & Jeffrey C. Fuhrer, 2002. "Estimating the Euler equation for output," Working Paper Series 2002-12, Federal Reserve Bank of San Francisco.

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