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The IS-LM-BB: a model of unconventional monetary policy

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  • Waldo Mendoza

    (Departamento de Economía - Pontificia Universidad Católica del Perú)

Abstract

The Monetary policy of the United States has not been the same since the 2008-2009 international crisis. Following the crisis, given that the federal funds interest rate - the conventional monetary policy instrument - fell to almost zero, the Federal Reserve (FED) had to resort to two unconventional instruments: Firstly, an announcement on the future trajectory of the short-term interest rate. Secondly, direct intervention in the long-term bond market. The objective of this article is to extend the IS-LM model devised by Hicks (1937), to incorporate American monetary policy innovations. This updated model, unlike IS-LM, takes into account that the FED administers the short-term interest rate, not monetary supply, which is endogenous. On the other hand, so as to address quantitative easing, a long-term bond market is added to the IS-LM —in which there only exists a short-term bond market— by resorting to Tobin (1981). This article shows that the old models and the old methods remain very useful in dealing with contemporary macroeconomic problems.

Suggested Citation

  • Waldo Mendoza, 2013. "The IS-LM-BB: a model of unconventional monetary policy," Documentos de Trabajo / Working Papers 2013-366, Departamento de Economía - Pontificia Universidad Católica del Perú.
    • Handle: RePEc:pcp:pucwps:wp00366
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    File URL: http://files.pucp.edu.pe/departamento/economia/DDD366.pdf
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    1. Giovanna Aguilar & Jhonatan Claussen, 2013. "Social Efficiency in Peruvian Microfinance Institutions: a semi-parametric approach," Documentos de Trabajo / Working Papers 2013-358, Departamento de Economía - Pontificia Universidad Católica del Perú.
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      More about this item

      Keywords

      unconventional monetary policy; liquidity trap; IS-LM model; política monetaria no convencional; trampa de liquidez; modelo IS-LM;
      All these keywords.

      JEL classification:

      • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
      • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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