Transforming the IS-LM Model Sector By Sector

Robert Dimand

Chapter 2 in James Tobin, 2014, pp 24-43 from Palgrave Macmillan

Abstract: Abstract James Tobin was one of the second generation of American “Old Keynesians” (Tobin 1992, 1993), the generation that first encountered economics in the Great Depression rather than, like Alvin Hansen or Seymour Harris, discovering Keynes after becoming economists. He played a leading role in the transformation of the IS-LM model with simple equations for the money market and the flow of investment into a modeling framework with a much more fully developed treatment of asset markets and investment, and mounted a spirited defense of this approach against New Classical critiques. After taking part as a student and post-doctoral fellow in Alvin Hansen’s reformulation of IS-LM, Tobin’s subsequent career centered on replacing the money market equilibrium equation and the investment function of the IS-LM model with what he termed a “General Equilibrium Approach to Monetary Theory” (the title of Tobin’s 1969 contribution to the inaugural issue of the Journal of Money, Credit and Banking) replacing “the interest rate” with a menu of asset returns, and paying attention to stock-flow dynamics. This was a general equilibrium approach in the sense that equilibria in the various markets for stocks of assets were linked by the adding-up constraint on wealth (the demands for individual assets must add up to total wealth).

Keywords: Interest Rate; Risky Asset; Money Demand; Demand Shock; Asset Market (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:pal:gtechp:978-1-137-43195-0_3

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DOI: 10.1057/9781137431950_3

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