IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/9713.html
   My bibliography  Save this paper

IS-LM and Monetarism

Author

Listed:
  • Michael D. Bordo
  • Anna J. Schwartz

Abstract

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.

Suggested Citation

  • Michael D. Bordo & Anna J. Schwartz, 2003. "IS-LM and Monetarism," NBER Working Papers 9713, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9713
    Note: DAE ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w9713.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. William Darity, Jr. & Warren Young, 1995. "IS-LM: An Inquest," History of Political Economy, Duke University Press, vol. 27(1), pages 1-41, Spring.
    2. 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.
    3. 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.
    4. Brunner, Karl & Meltzer, Allan H, 1972. "Money, Debt, and Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 951-977, Sept.-Oct.
    5. 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.
    6. Laidler, David, 1981. "Monetarism: An Interpretation and an Assessment," Economic Journal, Royal Economic Society, vol. 91(361), pages 1-28, March.
    7. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1, April.
    8. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
    9. David Colander, 2004. "The Strange Persistence of the IS-LM Model," History of Political Economy, Duke University Press, vol. 36(5), pages 305-322, Supplemen.
    10. Summers, Lawrence H, 1991. " The Scientific Illusion in Empirical Macroeconomics," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(2), pages 129-148.
    11. Leonall C. Andersen & Jerry L. Jordan, 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.
    12. Michael De Vroey, 2000. "IS-LM à la Hicks versus IS-LM à la Modigliani," History of Political Economy, Duke University Press, vol. 32(2), pages 293-316, Summer.
    13. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
    14. 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.
    15. 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, June.
    16. Karl Brunner, 1968. "The role of money and monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 8-24.
    17. James Tobin, 1970. "Money and Income: Post Hoc Ergo Propter Hoc?," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 301-317.
    18. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Edward Nelson, 2004. "Money and the Transmission Mechanism in the Optimizing IS-LM Specification," History of Political Economy, Duke University Press, vol. 36(5), pages 271-304, Supplemen.
    2. Nelson, Edward & Schwartz, Anna J., 2008. "The impact of Milton Friedman on modern monetary economics: Setting the record straight on Paul Krugman's "Who was Milton Friedman?"," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 835-856, May.
    3. Hugh Rockoff, 2006. "On the Origins of "A Monetary History"," NBER Working Papers 12666, National Bureau of Economic Research, Inc.
    4. Roger E. Backhouse & David Laidler, 2004. "What Was Lost with IS-LM," History of Political Economy, Duke University Press, vol. 36(5), pages 25-56, Supplemen.
    5. Alexandre Flávio Silva Andrada, 2011. "Uma Breve História Sobre A Abordagem Dedesequilíbrio Na Economia," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting] 233, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    6. Rockoff, Hugh & White, Eugene N., 2012. "Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo," MPRA Paper 49672, University Library of Munich, Germany, revised May 2013.

    More about this item

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:nbr:nberwo:9713. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: () or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.