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

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Author Info
Edward Nelson

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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  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. [Downloadable!]
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