IDEAS home Printed from https://ideas.repec.org/p/wiw/wus005/1326.html
   My bibliography  Save this paper

Walras' law and the IS-LM model. A tale of progress and regress

Author

Listed:
  • Klausinger, Hansjörg

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 identification 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. (author's abstract)

Suggested Citation

  • Klausinger, Hansjörg, 2000. "Walras' law and the IS-LM model. A tale of progress and regress," Department of Economics Working Paper Series 69, WU Vienna University of Economics and Business.
    • Handle: RePEc:wiw:wus005:1326
    as

    Download full text from publisher

    File URL: https://epub.wu.ac.at/1326/
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ernst Matthias & Walpuski Dirk, 1996. "Integration von Geld- und Wertpapiermarkt im Keynesschen Makromodell. Eine Replik," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 215(2), pages 245-251, April.
    2. Felderer, Bernhard & Homburg, Stefan, 2005. "Makroökonomik und neue Makroökonomik: Kapitel I. Einige methodologische Überlegungen," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 92556, July.
    3. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    4. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    5. 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.
    6. Peter Howitt & Elisabetta de Antoni & Axel Leijonhufvud (ed.), 1999. "Money, Markets and Method," Books, Edward Elgar Publishing, number 1559.
    7. Woglom, Geoffrey, 1980. "Are period models well defined?," Journal of Macroeconomics, Elsevier, vol. 2(4), pages 333-350.
    8. S. T. Lowry (ed.), 1992. "Perspectives On The History Of Economic Thought," Books, Edward Elgar Publishing, number 290.
    9. 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 303-324, April.
    10. 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.
    11. Alan Rabin & Ziad Keilany, 1988. "Absolute Liquidity Preference and the Pigou Effect: A Reply," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 10(4), pages 655-657, July.
    12. Thomas Mayer, 1988. "Absolute Liquidity Preference and the Pigou Effect: A Comment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 10(4), pages 653-654, July.
    13. Klausinger Hansjörg, 1995. "Der Wertpapiermarkt im Keynesschen Modell: Einige kritische Anmerkungen," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 214(2), pages 226-237, April.
    14. 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.
    15. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen.
    16. Ernst Matthias & Walpuski Dirk, 1993. "Integration von Wertpapiermarkt und Geldmarkt im Keynesschen Makromodell/Integration of Bond Market and Money Market into the Keynesian Macroeconomic Model," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 212(5-6), pages 463-479, June.
    17. 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.
    18. Alan Rabin & Ziad Keilany, 1987. "A Note on the Incompatibility of the Pigou Effect and a Liquidity Trap," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 9(2), pages 291-296, January.
    19. Don Patinkin, 1958. "Liquidity Preference and Loanable Funds : Stock and Flow Analysis," Economica, London School of Economics and Political Science, vol. 25(100), pages 300-318, November.
    20. Victoria Chick, 1983. "Macroeconomics after Keynes: A Reconsideration of the General Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262530457, December.
    21. Alan Rabin & Ziad Keilany, 1987. "A Note on the Pigou Effect and Liquidity Trap: Reply," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 10(1), pages 166-167, September.
    22. 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 252-287, September.
    23. 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.
    24. 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 784-795, September.
    25. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    26. S. T. Lowry (ed.), 1992. "Perspectives On The History Of Economic Thought," Books, Edward Elgar Publishing, number 291.
    27. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    28. Vasilev, Aleksandar & Maksumov, Rashid, 2010. "Critical analysis of Chapter 23 of Keynes’s Notes on Mercantilism in The General Theory of Employment, Interest and Money (1936)," EconStor Research Reports 155318, ZBW - Leibniz Information Centre for Economics.
    29. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 197-216.
    30. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    31. Felderer, Bernhard & Homburg, Stefan, 1986. "Eine Fehlinterpretation des Keynesianischen Modells," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 201(5), pages 457-468.
    32. Alan Rabin & Ziad Keilany, 1986. "A Note on the Incompatibility of the Pigou Effect and a Liquidity Trap," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 9(2), pages 291-296, December.
    33. 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.
    34. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    35. Serge Coulombe, 1987. "A Note on the Pigou Effect and the Liquidity Trap," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 10(1), pages 163-165, September.
    36. Barens, Ingo, 1999. "From Keynes to Hicks - an aberration? IS-LM and the analytical nucleus of the general theory," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 11182, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    37. 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 659-670, September.
    38. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gerlinde Fellner & Matthias Sutter, 2009. "Causes, Consequences, and Cures of Myopic Loss Aversion – An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 119(537), pages 900-916, April.
    2. Hagemann, Harald, 2010. "L. Albert Hahn's Economic Theory of Bank Credit," Department of Economics Working Paper Series 134, WU Vienna University of Economics and Business.
    3. Engelbert Stockhammer & Paul Ramskogler, 2009. "Post-Keynesian economics How to move forward," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 6(2), pages 227-246.
    4. Theresa Grafeneder-Weissteiner, 2010. "Demographic change, growth and agglomeration," Department of Economics Working Papers wuwp132, Vienna University of Economics and Business, Department of Economics.
    5. Grafeneder-Weissteiner, Theresa & Prettner, Klaus, 2010. "Agglomeration processes in aging societies," Department of Economics Working Paper Series 131, WU Vienna University of Economics and Business.
    6. Riedl, Aleksandra & Rocha-Akis, Silvia, 2007. "Testing the tax competition theory: How elastic are national tax bases in western Europe?," Department of Economics Working Paper Series 112, WU Vienna University of Economics and Business.
    7. Engelbert Stockhammer & Lucas Grafl, 2010. "Financial Uncertainty and Business Investment," Review of Political Economy, Taylor & Francis Journals, vol. 22(4), pages 551-568.
    8. Paul Ramskogler, 2007. "Uncertainty, market power and credit rationing," Department of Economics Working Papers wuwp105, Vienna University of Economics and Business, Department of Economics.
    9. Annemarie Steidl & Engelbert Stockhammer, 2007. "Coming and leaving. Internal mobility in late Imperial Austria," Department of Economics Working Papers wuwp107, Vienna University of Economics and Business, Department of Economics.
    10. Eckhard Hein, 2010. "Shareholder Value Orientation, Distribution And Growth—Short‐ And Medium‐Run Effects In A Kaleckian Model," Metroeconomica, Wiley Blackwell, vol. 61(2), pages 302-332, May.
    11. Theresa Grafeneder-Weissteiner & Klaus Prettner, 2009. "Agglomeration and population aging in a two region model of exogenous growth," Department of Economics Working Papers wuwp125, Vienna University of Economics and Business, Department of Economics.
    12. Engelbert Stockhammer & Paul Ramskogler, 2008. "Uncertainty and Exploitation in History," Journal of Economic Issues, Taylor & Francis Journals, vol. 42(1), pages 175-194, March.
    13. Silvia Rocha-Akis, 2006. "Labour tax policies and strategic offshoring under unionised oligopoly," Department of Economics Working Papers wuwp099, Vienna University of Economics and Business, Department of Economics.
    14. Harald Badinger & Ingrid Kubin, 2007. "Vom kurzfristigen zum mittelfristigen Gleichgewicht in einer offenen Volkswirtschaft unter fixen und flexiblen Wechselkursen," Department of Economics Working Papers wuwp101, Vienna University of Economics and Business, Department of Economics.
    15. Grafeneder-Weissteiner, Theresa, 2010. "Demographic change, growth and agglomeration," Department of Economics Working Paper Series 132, WU Vienna University of Economics and Business.
    16. Currie, Martin & Kubin, Ingrid, 2005. "Fixed price dynamics versus flexible price dynamics," Department of Economics Working Paper Series 89, WU Vienna University of Economics and Business.
    17. Pasquale Commendatore & Ingrid Kubin & Carmelo Petraglia, 2009. "Footloose Capital and Productive Public Services," Chapters, in: Neri Salvadori & Pasquale Commendatore & Massimo Tamberi (ed.), Geography, Structural Change and Economic Development, chapter 1, Edward Elgar Publishing.
    18. Grandner, Thomas, 2007. "Product differentiation in a linear city and wage bargaining," Department of Economics Working Paper Series 109, WU Vienna University of Economics and Business.
    19. Özlem Onaran, 2007. "International financial markets and fragility in the Eastern Europe: "can it happen" here?," Department of Economics Working Papers wuwp108, Vienna University of Economics and Business, Department of Economics.
    20. Smet, Koen, 2007. "Stuck in the middle? The structure of trade between South Africa and its major trading partners," Department of Economics Working Paper Series 115, WU Vienna University of Economics and Business.
    21. Figerl, Jürgen & Grandner, Thomas, 2008. "Job quality and wages in duopsony," Department of Economics Working Paper Series 121, WU Vienna University of Economics and Business.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    2. Maußner Alfred, 1988. "Strom- und Bestandsrestriktionen in makroökonomischen Modellen/Flow and Stock Constraints in Macroeconomic Models," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 205(4), pages 316-331, October.
    3. Jérôme Creel & Henri Sterdyniak, 1999. "La politique monétaire sans monnaie," Revue de l'OFCE, Programme National Persée, vol. 70(1), pages 111-153.
    4. Nwobodo, Ikechukwu C., 1975. "The determinants of portfolio selection by life insurance companies and the effects of monetary policy on their portfolios," ISU General Staff Papers 197501010800006599, Iowa State University, Department of Economics.
    5. Schabert, Andreas, 2005. "Discretionary Policy, Multiple Equilibria, and Monetary Instruments," CEPR Discussion Papers 5400, C.E.P.R. Discussion Papers.
    6. Loisel, Olivier, 2021. "The implementation of stabilization policy," Theoretical Economics, Econometric Society, vol. 16(2), May.
    7. repec:hal:spmain:info:hdl:2441/2961 is not listed on IDEAS
    8. Benjamin M. Friedman, 1978. "Price Inflation, Portfolio Choice, and Nominal Interest Rates," NBER Working Papers 0235, National Bureau of Economic Research, Inc.
    9. Goodhart, C.A.E. & Sunirand, P. & Tsomocos, D.P., 2011. "The optimal monetary instrument for prudential purposes," Journal of Financial Stability, Elsevier, vol. 7(2), pages 70-77, June.
    10. Henri Sterdyniak & Pierre Villa, 1986. "Des conséquences conjoncturelles de la régulation monétaire," Revue Économique, Programme National Persée, vol. 37(6), pages 963-998.
    11. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    12. C. A. E. Goodhart, 2009. "The Continuing Muddles of Monetary Theory: A Steadfast Refusal to Face Facts," Economica, London School of Economics and Political Science, vol. 76(s1), pages 821-830, October.
    13. William R. White, 2013. "Is Monetary Policy a Science? The Interaction of Theory and Practice over the Last 50 Years," SUERF 50th Anniversary Volume Chapters, in: Morten Balling & Ernest Gnan (ed.), 50 Years of Money and Finance: Lessons and Challenges, chapter 3, pages 73-116, SUERF - The European Money and Finance Forum.
    14. Stephen J. Turnovsky, 2011. "Stabilization Theory and Policy: 50 Years after the Phillips Curve," Economica, London School of Economics and Political Science, vol. 78(309), pages 67-88, January.
    15. Hetzel, Robert L., 1995. "Why the price level wanders aimlessly," Journal of Economics and Business, Elsevier, vol. 47(2), pages 151-163, May.
    16. Alan S. Blinder, 2019. "What does Jerome Powell know that William McChesney Martin didn’t—and what role did academic research play in that?," Working Papers 259, Princeton University, Department of Economics, Center for Economic Policy Studies..
    17. Benjamin M. Friedman, 1980. "The Effect of Shifting Wealth Ownership on the Term Structure of Interest Rates," NBER Working Papers 0239, National Bureau of Economic Research, Inc.
    18. Don Patinkin, 1987. "Walras' Law," WIDER Working Paper Series wp-1987-013, World Institute for Development Economic Research (UNU-WIDER).
    19. Keita, Moussa, 2015. "Eléments de Macroéconomie [Elements of Macroeconomics]," MPRA Paper 67094, University Library of Munich, Germany.
    20. David Eagle, 2005. "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, University Library of Munich, Germany.
    21. Arief Ramayandi, 2007. "Approximating Monetary Policy: Case Study for the ASEAN-5," Working Papers in Economics and Development Studies (WoPEDS) 200707, Department of Economics, Padjadjaran University, revised Aug 2007.

    More about this item

    Keywords

    Walras' law; IS-LM-model; beginning-of-period-equilibrium; end-of-period-equilibrium; liquidity trap; optimal monetary instrument;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wiw:wus005:1326. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: WU Library (email available below). General contact details of provider: https://research.wu.ac.at/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.