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Money and the transmission mechanism in the optimizing IS-LM specification

  • Edward Nelson

This paper discusses criticisms of the IS-LM framework in the macroeconomic literature of the last 40 years, and how the modern optimizing version of IS-LM addresses those criticisms. It is argued that many of the criticisms had been addressed by best-practice traditional IS-LM. Relative to this traditional setup, the optimizing IS-LM version gives full recognition to the intertemporal nature of households' saving decisions. Like traditional IS-LM, however, the optimizing version remains vulnerable to the monetarist critique: by recognizing an insufficient number of distinct assets, the IS-LM framework tends to understate the value of money as an indicator for monetary policy.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-019.

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Date of creation: 2003
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Handle: RePEc:fip:fedlwp:2003-019
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