IS-LM and Modern Macroeconomics

IS-LM and Modern Macroeconomics

RECENT ECONOMIC THOUGHT SERIES Editors: William Darity, Jr. University of North Carolina Chapel Hill, North Carolina, USA James K. Galbraith University of Texas at Austin Austin, Texas, USA Other books in the series: Well, Paul: POST-KEYNESIAN ECONOMIC THEORY Schofield, Norman: COLLECTIVE DECISION-MAKING: SOCIAL CHOICE AND POLITICAL ECONOMY Menchik, Paul L.: HOUSEHOLD AND FAMILY ECONOMICS Gupta, Kanhaya L.: EXPERIENCES WITH FINANCIAL LIBERALIZATION Cohen, Avi l; Hagemann, Harald; and Smith in, John: MONEY, FINANCIAL INSTITUTIONS AND MACROECONOMICS Mason, P.L. and Williams, R.M.: RACE, MARKETS AND SOCIAL OUTCOMES Gupta, Satya Dev: THE POLITICAL ECONOMY OF GLOBALIZATION Fisher, R.C.: INTERGOVERNMENTAL FISCAL RELATIONS Mariussen, A. and Wheelock, J.: HOUSEHOLDS, WORK AND ECONOMIC CHANGE: A COMPARATIVE INSTITUTIONAL PERSPECTIVE Gupta, Satya Dev: GLOBALIZATION, GROWTH AND SUSTAINABILITY Gupta, Satya Dev: DYNAMICS OF GLOBALIZATION AND DEVELOPMENT Medema, Steven G.: COASEAN ECONOMICS: LAW AND ECONOMICS AND THE NEW INSTITUTIONAL ECONOMICS Peoples, James: REGULA TORY REFORM AND LABOR MARKETS Dennis, Ken: RATIONALITY IN ECONOMICS: AL TERNA TIVE PERSPECTIVES Ahiakpor, James e.w.: KEYNES AND THE CLASSICS RECONSIDERED Wolfson, Murray: THE POLITICAL ECONOMY OF WAR AND PEACE Jain, A.K.: ECONOMICS OF CORRUPTION Wheelock, J. and Vail, J.: WORK AND IDLENESS: THE POLITICAL ECONOMY OF FULL EMPLOYMENT Dean, James M. and Waterman, A.M.e.: RELIGION AND ECONOMICS: NORMA TIVE SOCIAL THEORY Gupta, Kanhaya: FOREIGN AID: NEW PERSPECTIVES MacDonald, R. and Stein, J.: EQUILIBIRUM EXCHANGE RATES Chilcote, Ronald M.: THE POLITICAL ECONOMY OF IMPERIALISM: CRITICAL APPRAISALS Silber, Jacques: HANDBOOK ON INCOME INEQUALITY MEASUREMENT Elsner, W. and Groenewegen, l: INDUSTRIAL POLICIES AFTER 2000

IS-LM and Modern Macroeconomics edited by Warren Young Ben Zion Zilberfarb Department ofeconomics Bar Ban University Israel ~. " SPRINGER-SCIENCE+BUSINESS MEDIA, LLC

Library of Congress Cataloging-in-Publication Data IS-LM and modem macroeconomics / edited by Warren Young, Ben Zion Zilberfarb. p. cm. -- (Recent economic thought series) IncJudes bibliographical references and index. ISBN 978-0-7923-7966-9 ISBN 978-94-010-0644-6 (ebook) DOI 10.1007/978-94-010-0644-6 1. IS-LM model (Macroeconomics) 2. Macroeconomics. I. Young, Warren, 1949- II. Zilberfarb, Benzion. III. Series. HB 172.5.18 2000 339--dc21 00-048786 Copyright 2000 by Springer Science+Business Media New York OriginaUy published by Kluwer Academic Publishers in 2000 AU rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher, Springer-Science+Business Media, LLC Printed on acid-free paper.

Dedication For our daughters: Shani and Natalie; Shelly, Ella Vered, Noa, and Rachel

TABLE OF CONTENTS Preface... ix Introduction: Quo Vadis IS-LM?... 1 1. Old, New and Post Keynesian Perspectives on the IS-LM Framework: A Contrast and Evaluation... 7 Huw Dixon and Bill Gerrard 2. Post Walrasian Macroeconomics and ISILM Analysis... 29 David Colander 3. IS-LM and Aggregate Demand: A Restatement... 43 David F. Heathfield 4. How to Construct IS and LM Curves in the Spirit of Hicks Or, Why We Do Not Need the Aggregate Demand Curve... 57 Ingo Barens 5. On Money in ISLM and AD/AS Models... 77 Colin Rogers and TK. Rymes 6. IS-LM and Leijonhufvud's Re-Appraisal..... 91 Bruce Littleboy 7. IS-LM and Macroeconometric Models... 107 Bert G. Hickman 8. Macroeconomics without IS-LM: a Counterfactual... 121 Robert Dimand 9. What Keynes Would Have Thought of the Development of IS-LM?... 133 J.w. Nevile 10. The IS-LM Model: Its Role in Macroeconomics... 151 L.R. Klein

List of Contributors Huw Dixon Bill Gerrard David Colander David Heathfield Ingo Barens Colin Rogers T.K. Rymes Bruce Littleboy Bert Hickman Robert Dimand J.W. Nevile L.R. Klein University of York, UK University of Leeds, UK Middlebury College, USA University of Southampton, UK Bergische Universitaet, Wuppertal, Germany University of Adelaide, Australia Carleton University, USA University of Queensland, Australia Stanford University, USA Brock University, Canada Uni versity of New South Wales, Australia Nobel Laureate, University of Pennsylvania, USA

PREFACE IS-LM is perhaps the prime example of "cognitive dissonance" in economics, and as the subject of this book, it is problematic to many economists. On the one hand, the IS-LM model is still taught by many academic economists or they use it to derive the AD-AS approach. On the other hand, the same economists realize the limitations of the basic IS-LM model and would not now use it for policy analysis, as they did in the past. The distinction between pedagogical and analytical efficacy is made by all the authors in this volume regarding the IS-LM model. Indeed, even those who would reject using the model for modem policy analysis still see the basic model as useful for teaching purposes. Moreover, in an augmented form, some of the authors in this volume would even see fit to use IS-LM for modem policy analysis. As will be seen, therefore, the IS-LM model is "not yet dead". Rather, as one of the editors put it some years ago, the model's "plasticity" has enabled it to undergo a metamorphosis into augmented form, enabling its continuing utilization in economics accordingly. At this point, we would like to thank all the authors of the papers in this volume for their support in seeing the project through. We would also like to thank Helen Ovadia for retyping the manuscripts and Kluwer Press for its patience in waiting for the fmal product to be produced. Warren Young Ben Zion Zilberfarb Department of Economics Bar Han University, Ramat Gan, Israel June 2000