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

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  • Hansjoerg Klausinger

    ()
    (Department of Economics, Vienna University of Economics & B.A.)

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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Bibliographic Info

Paper provided by Vienna University of Economics, 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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References

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  1. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers 14, Cowles Foundation for Research in Economics, Yale University.
  2. 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.
  3. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  4. Felderer, Bernhard & Homburg, Stefan, 1986. "Eine Fehlinterpretation des Keynesianischen Modells," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 457-468.
  5. Woglom, Geoffrey, 1980. "Are period models well defined?," Journal of Macroeconomics, Elsevier, vol. 2(4), pages 333-350.
  6. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
  7. Felderer, Bernhard & Homburg, Stefan, 2005. "Makroökonomik und neue Makroökonomik," EconStor Books, ZBW - German National Library of Economics, number 92556, March.
  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.
  9. Parkin, Michael, 1978. "A Comparison of Alternative Techniques of Monetary Control under Rational Expectations," The Manchester School of Economic & Social Studies, University of Manchester, vol. 46(3), pages 252-87, September.
  10. 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.
  11. 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.
  12. 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.
  13. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen.
  14. Bain, A D & McGregor, Peter G, 1985. "Buffer-Stock Monetarism and the Theory of Financial Buffers," The Manchester School of Economic & Social Studies, University of Manchester, vol. 53(4), pages 385-403, December.
  15. 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.
  16. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
  17. 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.
  18. Buiter, Willem H & Eaton, Jonathan, 1981. "Keynesian Balance of Payments Models: Comment [On the Almost Total Inadequacy of Keynesian Balance-of-Payments Theory]," American Economic Review, American Economic Association, vol. 71(4), pages 784-95, September.
  19. Ferguson, J David & Hart, William R, 1980. "Liquidity Preference or Loanable Funds: Interest Rate Determination in Market Disequilibrium," Oxford Economic Papers, Oxford University Press, vol. 32(1), pages 57-70, March.
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Cited by:
  1. Theresa Grafeneder-Weissteiner & Klaus Prettner, 2009. "Agglomeration and population ageing in a two region model of exogenous growth," Working Papers 0901, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  2. Theresa Grafeneder-Weissteiner, 2010. "Demographic change, growth and agglomeration," Department of Economics Working Papers wuwp132, Vienna University of Economics, Department of Economics.

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