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An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis

Bennett McCallum and Edward Nelson

Journal of Money, Credit and Banking, 1999, vol. 31, issue 3, 296-316

Abstract: We ask whether relations of the IS-LM type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations. The main result is that only one change--the addition of a term regarding expected future income--is needed to make the IS function match a fully optimizing model, whereas no changes are needed for the LM function. This modification leads to a dynamic, forward-looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications. Theoretical applications concerning price level determinacy and gradual price adjustment are included.

Date: 1999
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Citations: View citations in EconPapers (410)

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Working Paper: An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis (1997) Downloads
Working Paper: An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis
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