IDEAS home Printed from https://ideas.repec.org/a/pcp/pucrev/y2015i75p123-150.html

IS-LM Stability Revisited: Samuelson was Right, Modigliani was Wrong

Author

Listed:
  • Waldo Mendoza Bellido

    ( Departamento de Economía de la Pontificia Universidad Católica del Perú)

Abstract

In Hicks’s IS-LM model, where it is assumed that production is determined in the goods market and the interest rate is determined in the money market, when the marginal propensity to spend is greater than one, the IS has a positive slope. Modigliani (1944), Varian (1977) and Sargent (1987) determined that in this special case the IS-LM model is stable when the LM slope is greater than the IS. In line with Samuelson (1941), this article shows that in this case the model is stable when the IS slope is greater than the LM slope. However, in this stable case the model does not have a useful economic meaning. One solution to this theoretical problem is to abandon the Keynesian adjustment mechanism and replace it with the Classical mechanism where the interest rate is determined in the goods market and production is determined in the money market. In this case, the IS-LM model is stable when the LM is steeper than the IS.

Suggested Citation

  • Waldo Mendoza Bellido, 2015. "IS-LM Stability Revisited: Samuelson was Right, Modigliani was Wrong," Revista Economía, Fondo Editorial - Pontificia Universidad Católica del Perú, vol. 38(75), pages 123-150.
    • Handle: RePEc:pcp:pucrev:y:2015:i:75:p:123-150
    as

    Download full text from publisher

    File URL: https://revistas.pucp.edu.pe/index.php/economia/article/view/13735/14359
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics

    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:pcp:pucrev:y:2015:i:75:p:123-150. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/depucpe.html .

    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.