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Walras' Law and the IS-LM Model. A Tale of Progress and Regress

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Author Info
Hansjoerg Klausinger () (Department of Economics, Vienna University of Economics & B.A.)

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Abstract

This paper deals with the integration of Walras' law into Keynesian macroeconomics and the attempts at a consistent specification of period models (beginning- vs. end-of-period-equilibrium). Three examples are examined where neglect of a consistent specification led to erroneous results: (1) the identication of the IS-condition with equilibrium of the "flow market" for bonds, (2) superficial treatments of the liquidity trap, and (3) the assumptions on the stochastic structure of monetary and real shocks in determining the optimal monetary instrument.

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Paper provided by Vienna University of Economics and B.A., Department of Economics in its series Department of Economics Working Papers with number wuwp069.

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Date of creation: May 2000
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Handle: RePEc:wiw:wiwwuw:wuwp069

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Related research
Keywords: Walras' Law; IS-LM-model; beginning-of-period-equilibrium; end-of-period-equilibrium; liquidity trap; optimal monetary instrument;

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Find related papers by JEL classification:
B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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  1. Parkin, Michael, 1978. "A Comparison of Alternative Techniques of Monetary Control under Rational Expectations," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 46(3), pages 252-87, September.
  2. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers 14, Cowles Foundation, Yale University. [Downloadable!]
  3. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation, Yale University. [Downloadable!]
  4. May, Josef, 1970. "Period analysis and continuous analysis in Patinkin's macroeconomic model," Journal of Economic Theory, Elsevier, vol. 2(1), pages 1-9, March. [Downloadable!] (restricted)
  5. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May. [Downloadable!] (restricted)
    Other versions:
  6. Woglom, Geoffrey, 1980. "Are period models well defined?," Journal of Macroeconomics, Elsevier, vol. 2(4), pages 333-350. [Downloadable!] (restricted)
  7. Foley, Duncan K, 1975. "On Two Specifications of Asset Equilibrium in Macroeconomic Models," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 303-24, April. [Downloadable!] (restricted)
  8. Hellwig, Martin, 1975. "The demand for money and bonds in continuous-time models," Journal of Economic Theory, Elsevier, vol. 11(3), pages 462-464, December. [Downloadable!] (restricted)
  9. Bain, A D & McGregor, Peter G, 1985. "Buffer-Stock Monetarism and the Theory of Financial Buffers," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 53(4), pages 385-403, December.
  10. Kuska, Edward A, 1978. "On the Almost Total Inadequacy of Keynesian Balance-of-Payments Theory," American Economic Review, American Economic Association, vol. 68(4), pages 659-70, September. [Downloadable!] (restricted)
  11. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
    Other versions:
  12. McCaleb, Thomas S. & Sellon, Gordon Jr., 1980. "On the consistent specification of asset markets in macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 6(3), pages 401-415, July. [Downloadable!] (restricted)
  13. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen. [Downloadable!] (restricted)
  14. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337. [Downloadable!] (restricted)
  15. Buiter, Willem H, 1980. "Walras' Law and All That: Budget Constraints and Balance Sheet Constraints in Period Models and Continuous Time Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 1-16, February. [Downloadable!] (restricted)
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