Journal Article

Rethinking the IS in IS-LM: adapting Keynesian tools to non-Keynesian economies Part 1

Abstract: The IS-LM diagram was developed as a tool for analyzing Keynesian economies-economies with \"sticky\" prices and myopic households. In a series of two articles, Evan Koenig shows that a graphical apparatus similar to the traditional IS-LM diagram can be used to analyze economies that have optimizing, forward-looking households. In particular, an expectations-augmented variant of IS-LM analysis is fully consistent with a popular real-business-cycle model. Thus, the IS-LM diagram has wide applicability as a pedagogical device and as a framework within which to discuss policy. ; This article deals with an economy in which the capital stock is fixed. A subsequent article will discuss how the expectations-augmented IS-LM framework developed here can be extended to an economy with capital investment.

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Economic and Financial Policy Review

Publication Date: 1993

Issue: Sep

Pages: 32-50