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IS-LM and Monetarism

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  • Michael D. Bordo
  • Anna J. Schwartz

Abstract

This paper discusses monetarist objections to the IS-LM model. We explore the views of two principal spokesmen for monetarism: Milton Friedman and the team of Karl Brunner and Allan Meltzer. Friedman did not explicitly state the reasons he generally chose not to use the IS-LM model in rejecting Keynesian views on the demand function for money, the role of autonomous expenditures in cyclical fluctuations, the potency of fiscal policy as against monetary policy, etc. He presented statistical findings, historical evidence, and econometric results to support his alternative analysis of macroeconomics, but his critics were unconvinced. In 1970, in an effort to use his critics' common language, he set up a model with explicit terms for IS-LM to encompass both the quantity theory and the income-expenditure theory. Friedman attributed the failure of this effort to the fact that he was a Marshallian, his opponents Walrasians. Brunner and Meltzer's objections to IS-LM were explicit. They found it too spare, so they elaborated it by adding a credit market, disaggregating the asset market by specifying three assets: base money, government debt, and real capital. They set up a model with financial institutions and utilized it to study the effects of a variety of policies. In brief, summarizing the views of both Friedman and Brunner and Meltzer, monetarists dislike the IS-LM framework because it limits monetary influence too narrowly, essentially to the interest elasticity of money demand, and defines investment in an excessively narrow fashion, and even that is not explicit.

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Bibliographic Info

Article provided by Duke University Press in its journal History of Political Economy.

Volume (Year): 36 (2004)
Issue (Month): 5 (Supplement)
Pages: 217-239

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Handle: RePEc:hop:hopeec:v:36:y:2004:i:5:p:217-239

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Keywords: IS-LM model; monetarism;

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References

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  1. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, National Bureau of Economic Research, Inc, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29 National Bureau of Economic Research, Inc.
  2. Bennett T. McCallum & Edward Nelson, . "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1997-71, Carnegie Mellon University, Tepper School of Business.
  3. Johnson, Harry G, 1971. "The Keynesian Revolution and the Monetarist Counter-Revolution," American Economic Review, American Economic Association, American Economic Association, vol. 61(2), pages 1-14, May.
  4. Karl Brunner, 1968. "The role of money and monetary policy," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 8-24.
  5. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867-1975," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number frie82-2.
  6. Warren Young & William Darity, Jr., 2004. "IS-LM-BP: An Inquest," History of Political Economy, Duke University Press, Duke University Press, vol. 36(5), pages 127-164, Supplemen.
  7. David Colander, 2003. "The Strange Persistence of the IS/LM Model," Middlebury College Working Paper Series, Middlebury College, Department of Economics 0307, Middlebury College, Department of Economics.
  8. Michael De Vroey, 2000. "IS-LM à la Hicks versus IS-LM à la Modigliani," History of Political Economy, Duke University Press, Duke University Press, vol. 32(2), pages 293-316, Summer.
  9. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
  10. James Tobin, 1969. "Money and Income: Post Hoc Ergo Propter Hoc?," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 283, Cowles Foundation for Research in Economics, Yale University.
  11. William Darity, Jr. & Warren Young, 1995. "IS-LM: An Inquest," History of Political Economy, Duke University Press, Duke University Press, vol. 27(1), pages 1-41, Spring.
  12. Summers, Lawrence H, 1991. " The Scientific Illusion in Empirical Macroeconomics," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 93(2), pages 129-48.
  13. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number frie71-1.
  14. Laidler, David, 1981. "Monetarism: An Interpretation and an Assessment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(361), pages 1-28, March.
  15. Brunner, Karl & Meltzer, Allan H, 1972. "Money, Debt, and Economic Activity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 80(5), pages 951-77, Sept.-Oct.
  16. Karl Brunner, 1971. "A Survey of Selected Issues in Monetary Theory," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 107(I), pages 1-146, March.
  17. Leonall C. Andersen & Jerry L. Jordon, 1968. "Monetary and fiscal actions: a test of their relative importance in economic stabilization," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 11-23.
  18. Bennett T. McCallum, 1999. "Recent developments in the analysis of monetary policy rules," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
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Citations

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Cited by:
  1. Hugh Rockoff, 2006. "On the Origins of "A Monetary History"," NBER Working Papers 12666, National Bureau of Economic Research, Inc.
  2. Roger E. Backhouse & David Laidler, 2004. "What Was Lost with IS-LM," History of Political Economy, Duke University Press, Duke University Press, vol. 36(5), pages 25-56, Supplemen.
  3. Nelson, Edward, 2003. "Money and the Transmission Mechanism in the Optimizing IS-LM Specification," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3898, C.E.P.R. Discussion Papers.
  4. Nelson, Edward & Schwartz, Anna J., 2008. "The impact of Milton Friedman on modern monetary economics: Setting the record straight on Paul Krugman's "Who was Milton Friedman?"," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(4), pages 835-856, May.
  5. Alexandre Flávio Silva Andrada, 2011. "Uma Breve História Sobre A Abordagem Dedesequilíbrio Na Economia," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of 233, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  6. Rockoff, Hugh & White, Eugene N., 2012. "Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo," MPRA Paper 49672, University Library of Munich, Germany, revised May 2013.

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