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Money and the Transmission Mechanism in the Optimizing IS-LM Specification

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  • Nelson, Edward

Abstract

This Paper discusses criticisms of the IS-LM framework in the macroeconomic literature of the last 40 years, and how the modern optimizing version of IS-LM addresses those criticisms. It is argued that models that include the optimizing IS-LM specification are legitimate vehicles for dynamic analysis: the evolution of nominal wages and prices is treated endogenously, and there is full recognition of the intertemporal nature of households’ saving decisions. The optimizing version of IS-LM analysis remains vulnerable, however, to the monetarist critique: by recognizing an insufficient number of distinct assets, the IS-LM framework tends to understate the value of money as an indicator for monetary policy.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3898.

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Date of creation: May 2003
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Handle: RePEc:cpr:ceprdp:3898

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Keywords: monetary policy; money; optimizing IS-LM specification; transmission mechanism;

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References

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Cited by:
  1. Roger E. Backhouse & David Laidler, 2004. "What Was Lost with IS-LM," History of Political Economy, Duke University Press, vol. 36(5), pages 25-56, Supplemen.
  2. Hafer, R.W. & Jones, Garett, 2008. "Dynamic IS curves with and without money: An international comparison," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 609-616, June.
  3. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
  4. David Laidler, 2003. "Monetary Policy without Money: Hamlet without the Ghost," UWO Department of Economics Working Papers 20037, University of Western Ontario, Department of Economics.

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