Keynesian Approach
Textbook Review of IS-LM Model
- Blanchard: Ch. 3, 4, 5; 14-3, 14-4; 17-1, 17-2.
- Mankiw: Ch. 10, 11 (including the appendix); 14-1.
The chapters of Blanchard are more detailed than those in Mankiw this week, and are recommended if you have access to both.
Criticisms and Extensions
- Robert G. King, "Will the New Keynesian Macroeconomics Resurrect the IS-LM Model?", The Journal of Economic Perspectives, v. 7, n. 1, Winter 1993, pp. 67–82
- Nelson, Edward. "Money and the Transmission Mechanism in the Optimizing IS-LM Specification," Federal Reserve Bank of St. Louis Working Paper 2003-019A, August 2003.
King (1993) critiques the IS-LM model and attempts by "New Keynesians" to reclaim its usefulness. This paper is part of a symposium in the Winter 1993 issue of the Journal of Economic Perspectives entitled "Keynesian Economics Today." There are several interesting articles in that symposium, some of which we may read later. (Ironically perhaps, particularly in light of the conclusion of King (1993), almost a decade later King (2000) (optional reading for this week) provides a very good discussion of how a "New IS-LM Model" addresses or incorporates many of the criticisms of his 1993 paper.)
The paper by Nelson (2003) is part of a Duke University History of Political Economy conference entitled "The IS-LM Model: Its Rise, Fall and Strange Persistence." Other papers from that conference may be of interest as you start to think about your course project.
- King, Robert. "The New IS-LM Model: Language, Logic, and Limits," Federal Reserve Bank of Richmond Economic Quarterly, v. 86, n. 3, Summer 2000.
Application: Choice of Monetary Instrument
An application of the IS-LM framework is the question of whether a central bank should use a monetary aggregate or an interest rate as its policy instrument. Poole (1970) is the original reference; Walsh (1998) provides a textbook account — see sections 9.1 through 9.3.1. (Optional reading, although we will review a version of the model in lecture.)
- Poole, William. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, v. 84, n. 2. (May, 1970), pp. 197–216.
- Walsh, Carl E. Monetary Theory and Policy, MIT Press, 1998.