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Money and the transmission mechanism in the optimizing IS-LM specification

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  • Edward Nelson

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 many of the criticisms had been addressed by best-practice traditional IS-LM. Relative to this traditional setup, the optimizing IS-LM version gives full recognition to the intertemporal nature of households' saving decisions. Like traditional IS-LM, however, the optimizing version remains vulnerable 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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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-019.

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Date of creation: 2003
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Handle: RePEc:fip:fedlwp:2003-019

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Keywords: Money ; Monetary policy ; Macroeconomics;

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Cited by:
  1. 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.
  2. Roger Backhouse & David Laidler, 2003. "What Was Lost with IS-LM," UWO Department of Economics Working Papers 20036, University of Western Ontario, Department of Economics.
  3. 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.
  4. 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.

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