Tuesday, February 10, 2015

Teaching macroeconomics: the resilience of the ISLM model

Teaching ISLM this and next week. I have posted in the past on this, so I'll just put the links below to the relevant posts.

ISLM: What is it good for?

ISLM: a further explanation and a defense

Krugman is actually right on ISLM and Minsky

There are more posts that deal with some relevant issues that you can access if you click on the ISLM label below.

The interesting thing is that, although the ISLM is less used in theory, in particular because the multiplier story at the core of the IS has been substituted by a Ramsey intertemporal maximization story and the LM has been substituted by a Wicksellian interest rate rule, it is still the workhorse of macroeconomic teaching, and likely of simple policy thinking. In many ways the ISLM remains a much better basis for thinking about the economy than modern New Keynesian DSGE models (if nothing else because of the multiplier).

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