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IS-LM and Monetarism

  • Michael D. Bordo
  • Anna J. Schwartz

This paper discusses monetarist objections to the IS-LM model. We explore the views of two principal spokesmen for monetarism: Milton Friedman and the team of Karl Brunner and Allan Meltzer. Friedman did not explicitly state the reasons he generally chose not to use the IS-LM model in rejecting Keynesian views on the demand function for money, the role of autonomous expenditures in cyclical fluctuations, the potency of fiscal policy as against monetary policy, etc. He presented statistical findings, historical evidence, and econometric results to support his alternative analysis of macroeconomics, but his critics were unconvinced. In 1970, in an effort to use his critics' common language, he set up a model with explicit terms for IS-LM to encompass both the quantity theory and the income-expenditure theory. Friedman attributed the failure of this effort to the fact that he was a Marshallian, his opponents Walrasians. Brunner and Meltzer's objections to IS-LM were explicit. They found it too spare, so they elaborated it by adding a credit market, disaggregating the asset market by specifying three assets: base money, government debt, and real capital. They set up a model with financial institutions and utilized it to study the effects of a variety of policies. In brief, summarizing the views of both Friedman and Brunner and Meltzer, monetarists dislike the IS-LM framework because it limits monetary influence too narrowly, essentially to the interest elasticity of money demand, and defines investment in an excessively narrow fashion, and even that is not explicit.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9713.

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Date of creation: May 2003
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Publication status: published as Bordo, Michael D. and Anna J. Schwartz. "IS-LM And Monetarism," History of Political Economy, 2004, v36(4,Winter), 217-239.
Handle: RePEc:nbr:nberwo:9713
Note: DAE ME
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  1. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  2. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29 National Bureau of Economic Research, Inc.
  3. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1, December.
  4. De Vroey, Michel, 1997. "IS-LM "à la Hicks" versus IS-LM "à la Modigliani"," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1998003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. William Darity, Jr. & Warren Young, 1995. "IS-LM: An Inquest," History of Political Economy, Duke University Press, vol. 27(1), pages 1-41, Spring.
  6. David Colander, 2003. "The Strange Persistence of the IS/LM Model," Middlebury College Working Paper Series 0307, Middlebury College, Department of Economics.
  7. Johnson, Harry G, 1971. "The Keynesian Revolution and the Monetarist Counter-Revolution," American Economic Review, American Economic Association, vol. 61(2), pages 1-14, May.
  8. Leonall C. Andersen & Jerry L. Jordon, 1968. "Monetary and fiscal actions: a test of their relative importance in economic stabilization," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 11-23.
  9. Tobin, James, 1970. "Money and Income: Post Hoc Ergo Propter Hoc?," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 301-17, May.
  10. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
  11. Karl Brunner, 1968. "The role of money and monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 8-24.
  12. Warren Young & William Darity, Jr., 2004. "IS-LM-BP: An Inquest," History of Political Economy, Duke University Press, vol. 36(5), pages 127-164, Supplemen.
  13. Brunner, Karl & Meltzer, Allan H, 1972. "Money, Debt, and Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 951-77, Sept.-Oct.
  14. Bennett T. McCallum, 1999. "Recent developments in the analysis of monetary policy rules," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
  15. Summers, Lawrence H, 1991. " The Scientific Illusion in Empirical Macroeconomics," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(2), pages 129-48.
  16. Laidler, David, 1981. "Monetarism: An Interpretation and an Assessment," Economic Journal, Royal Economic Society, vol. 91(361), pages 1-28, March.
  17. Karl Brunner, 1971. "A Survey of Selected Issues in Monetary Theory," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 107(I), pages 1-146, March.
  18. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2, December.
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