Rethinking the IS in IS-LM: adapting Keynesian tools to non-Keynesian economies Part 1
The IS-LM diagram was developed as a tool for analyzing Keynesian economies-economies with "sticky" prices and myopic households. In a series of two articles, Evan Koenig shows that a graphical apparatus similar to the traditional IS-LM diagram can be used to analyze economies that have optimizing, forward-looking households. In particular, an expectations-augmented variant of IS-LM analysis is fully consistent with a popular real-business-cycle model. Thus, the IS-LM diagram has wide applicability as a pedagogical device and as a framework within which to discuss policy. ; This article deals with an economy in which the capital stock is fixed. A subsequent article will discuss how the expectations-augmented IS-LM framework developed here can be extended to an economy with capital investment.
Volume (Year): (1993)
Issue (Month): Sep ()
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- Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-429, November.