TEL  Vol.5 No.2 , April 2015
IS-LM Paradigm in Macroeconomics: A Survey and Evaluation
Author(s) Haiming Li1, Xiao Wu2
ABSTRACT
This paper analyzes many serious defects existing in traditional aggregate demand/aggregate supply paradigm based on IS-LM model. Those defects cause the situation that IS-LM model declines gradually, but it is still not dead, and continuously revives through modification. This paper distinguishes from rounds of modification on traditional aggregate demand/aggregate supply paradigm. The first round of modification was just introducing the dynamic ad hoc IS-LM model of rational expectation which started from the end of 1970s and the beginning of 1980s. Because the micro-foundation problems are not solved and the rational expectation carries out extreme judgment on monetary neutrality and ineffectiveness of macroeconomic policy, the first modification fails to realize big success. The second round of modification is just happening; through introducing rational expectation and New Phillips Curve (NPC), the powerful improvement has been made in micro-foundation, dynamic form, and monetary policy rules, and the model is called IS-LM/ MP-NPC model. This paper also points out some limitations which are not solved in the second modification.

Cite this paper
Li, H. and Wu, X. (2015) IS-LM Paradigm in Macroeconomics: A Survey and Evaluation. Theoretical Economics Letters, 5, 296-303. doi: 10.4236/tel.2015.52035.
References
[1]   Dornbusch, R. and Fischer, S. (1984) Macroeconomics. 3rd Edition, McGraw-Hill, New York.

[2]   Young, W. and Zilberfarb, B.Z. (2000) Introduction: Quo Vadis IS-LM? In: Young, W. and Zilberfarb, B.Z., Eds., IS-LM and Modern Macroeconomics, Kluwer Academic Publishers, 1-6. http://dx.doi.org/10.1007/978-94-010-0644-6_1

[3]   Solow, R.Mr. (1984) Hicks and the Classics. Oxford Economic Papers, 36, 13-25.

[4]   Lucas, R.E. (1976) Econometric Policy Evaluation: A Critique. In: Lucas, R.E., Ed., Studies in Business-Cycle Theory, MIT Press, Cambridge, 104-130. http://dx.doi.org/10.1016/S0167-2231(76)80003-6

[5]   Hicks, J. (1945) La theorie de Keynes après neuf ans. Revue d’EconomiePolitique, 55, 1-11.

[6]   Colander, D.C. (2004) The Strange Persistence of the IS-LM Model. History of Political Economy, 36, 305-322. http://dx.doi.org/10.1215/00182702-36-Suppl_1-305

[7]   Vercelli, A. (1999) The Evolution of IS-LM Models: Empirical Evidence and Theoretical Presuppositions. Journal of Economic Methodology, 6, 199-219. http://dx.doi.org/10.1080/13501789900000014

[8]   Chick, V. (1973) The Theory of Monetary Policy. Gray-Mills, London.

[9]   Romer, D. (2000) Keynesian Macroeconomics without the LM Curve. The Journal of Economic Perspectives, 14, 149-169. http://dx.doi.org/10.1257/jep.14.2.149

[10]   Walsh, C. (2002) Teaching Inflation Targeting: An Analysis for Intermediate Macro. Journal of Economic Education, 33, 333-346. http://dx.doi.org/10.1080/00220480209595331

[11]   Sargent, T.J. and Wallace, N. (1975) “Rational” Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule. Journal of Political Economy, 83, 241-254. http://dx.doi.org/10.1086/260321

[12]   Blanchard, O.J. (1981) Output, the Stock Market and Interest Rates. American Economic Review, 71, 132-143.

[13]   McCallum, B. (1989) Monetary Economics: Theory and Policy. Macmillan, New York.

[14]   Koenig, E. (1993) Rethinking the IS in IS-LM: Adapting Keynesian Tools to Non-Keynesian Economics. Part 1. Federal Reserve Bank of Dallas Economic Review, 33-49.

[15]   Auerbach, A. and Kotlikoff, L. (1995) Macroeconomics: An Integrated Approach. South-Western, Cincinnati.

[16]   Bernanke, B. and Woodford, M. (1997) Inflation Forecasts and Monetary Policy. Journal of Money, Credit and Banking, 29, 653-684. http://dx.doi.org/10.2307/2953656

[17]   McCallum, B. and Nelson, E. (1999) An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis. Journal of Money, Credit, and Banking, 31, 296-316. http://dx.doi.org/10.2307/2601113

[18]   King, R. (2000) The New IS-LM Model: Language, Logic, and Limits. Economic Quarterly, Federal Reserve Bank of Richmond, 86, 45-103. http://ssrn.com/abstract=2126570

[19]   Bofinger, P., Mayer, E. and Wollmershauser, T. (2002) The BMW Model: Simple Macroeconomics for Closed and Open Economies—A Requiem for the IS/LM-AS/AD and the Mundell-Fleming Model. Wurzburg Economic Papers, 35, 1-86.

[20]   Bofinger, P., Mayer, E. and Wollmershauser, T. (2006) The BMW Model: A New Framework for Teaching Monetary Economics. The Journal of Economic Education, 37, 98-117. http://dx.doi.org/10.3200/JECE.37.1.98-117

[21]   Hoover, K.D. (2006) A Neo-Wicksellian in a New Classical World: The Methodology of Michael Woodford’s Interest and Prices. Journal of the History of Economic Thought, 28, 143-149. http://dx.doi.org/10.1080/10427710600676322

[22]   Marschak, J. (1953) Economic Measurements for Policy and Predictions. In: Hood, W.C. and Koopmans, T.C., Eds., Studies in Econometric Method, Cowles Foundations Monographno No. 14, Wiley, New York.

[23]   Haul, R.E. and Taylor, J.B. (2002) Macroeconomics. 5th Edition, China Renmin University Press, Beijing.

[24]   DeLong, J. B. and Olney, M.L. (2006) Macroeconomics. 2nd Edition, McGraw-Hill, Inc., New York.

[25]   Haul, R.E. and David, H.P. (2008) Macroeconomics. China Renmin University Press, Beijing.

[26]   Taylor, J.B. (2007) Macroeconomics. 5th Edition, China Market Publishing House, Beijing.

 
 
Top