by Summary:
I hope that this model will be taken up by more colleagues as it is very clear now that the IS/LM model “does not work”. If you make it more realistic by saying that investment does not depend on the rate of interest (vertical IS curve) and that the central bank determines the interest rate (horizontal LM curve), then you will have wasted 3-4 lectures to explain the goods market (IS curve) and the money market (LM curve) only to conclude that both do not matter in practice. It is only a small step from there to conclude that teaching the IS/LM model is a waste of time. You might just say that “demand determines supply, which determines employment” and that “government spending and private investment, which both do not depend on the rate of interest, increase demand”. Your students will
Topics:
Mike Norman considers the following as important: economic modeling, ISLM, MMT, SFC modeling, stock-flow consistent modeling, wynne godley
This could be interesting, too:
I hope that this model will be taken up by more colleagues as it is very clear now that the IS/LM model “does not work”. If you make it more realistic by saying that investment does not depend on the rate of interest (vertical IS curve) and that the central bank determines the interest rate (horizontal LM curve), then you will have wasted 3-4 lectures to explain the goods market (IS curve) and the money market (LM curve) only to conclude that both do not matter in practice. It is only a small step from there to conclude that teaching the IS/LM model is a waste of time. You might just say that “demand determines supply, which determines employment” and that “government spending and private investment, which both do not depend on the rate of interest, increase demand”. Your students will
Topics:
Mike Norman considers the following as important: economic modeling, ISLM, MMT, SFC modeling, stock-flow consistent modeling, wynne godley
This could be interesting, too:
Mike Norman writes Jared Bernstein, total idiot. You have to see this to believe it.
Steve Roth writes MMT and the Wealth of Nations, Revisited
Matias Vernengo writes On central bank independence, and Brazilian monetary policy
Michael Hudson writes International Trade and MMT with Keen, Hudson
I hope that this model will be taken up by more colleagues as it is very clear now that the IS/LM model “does not work”. If you make it more realistic by saying that investment does not depend on the rate of interest (vertical IS curve) and that the central bank determines the interest rate (horizontal LM curve), then you will have wasted 3-4 lectures to explain the goods market (IS curve) and the money market (LM curve) only to conclude that both do not matter in practice. It is only a small step from there to conclude that teaching the IS/LM model is a waste of time. You might just say that “demand determines supply, which determines employment” and that “government spending and private investment, which both do not depend on the rate of interest, increase demand”. Your students will easily get it and you save 3-4 lectures for something else, like my IS/MY model.
Bravo! A big step in the right direction in teaching Econ 101. And it is not just Econ 101, Paul Krugman has basically stated that he uses the IS/LM as his macroeconomic lens.
A spreadsheet version of the IS/MY model (alternative to IS/LM model)
Dirk Ehnts | Lecturer at Bard College Berlin, research assistant at the Technical University of Chemnitz, and spokesperson of the board of Pufendorf-Gesellschaft eV in Berlin