Working Paper

Money and the transmission mechanism in the optimizing IS-LM specification

Abstract: This paper discusses criticisms of the IS-LM framework in the macroeconomic literature of the last 40 years, and how the modern optimizing version of IS-LM addresses those criticisms. It is argued that many of the criticisms had been addressed by best-practice traditional IS-LM. Relative to this traditional setup, the optimizing IS-LM version gives full recognition to the intertemporal nature of households' saving decisions. Like traditional IS-LM, however, the optimizing version remains vulnerable to the monetarist critique: by recognizing an insufficient number of distinct assets, the IS-LM framework tends to understate the value of money as an indicator for monetary policy.

Keywords: Money; Monetary policy; Macroeconomics;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2003

Number: 2003-019