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New Keynesian DSGE Models and the IS-LM Paradigm


  • Ulrich Frische

    () (University of Hamburg)

  • Ingrid Größl

    () (University of Hamburg)


New Keynesian DSGE models propose a dynamic and expectational version of the old IS-LM paradigm. Acknowledging that the Taylor rule as a substitute for the LM-curve has its merits we show that standard DSGE models do not model how the central bank achieves its targets. In filling this gap we make evident that models neglecting a store-of-value function of money but still assuming a Taylor rule are inconsistent. Our major point concerns the-so called new Keynesian IS-curve. We prove that DSGE models which typically rest on the assumption of representative agents are unable to derive the IS-curve. This implies that these models lack the capability to analyse the role of savings as a a gap in aggregate demand. By assuming overlapping generations we make evident how this shortcoming can be avoided. We also show how OLG models add a richer dynamics to the standard DSGE approach.

Suggested Citation

  • Ulrich Frische & Ingrid Größl, 2010. "New Keynesian DSGE Models and the IS-LM Paradigm," IMK Working Paper 1-2010, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:1-2010

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    References listed on IDEAS

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    Blog mentions

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    1. Trying to justify IS-LM
      by Economic Logician in Economic Logic on 2010-12-16 21:27:00


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    Cited by:

    1. Sebastian Dullien, 2010. "Macroeconomic Theory and Macroeconomic Pedagogy – A review of the book edited by Giuseppe Fontana and Mark Setterfield," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 7(2), pages 266-271.

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