 IS-LM Stability Revisited: Samuelson was Right, Modigliani was WrongRevista Economía, 2015, vol. 38, issue 75, 123-150 Abstract: In Hicks’s IS-LM model, where it is assumed that production is determined in the goods market and the interest rate is determined in the money market, when the marginal propensity to spend is greater than one, the IS has a positive slope. Modigliani (1944), Varian (1977) and Sargent (1987) determined that in this special case the IS-LM model is stable when the LM slope is greater than the IS. In line with Samuelson (1941), this article shows that in this case the model is stable when the IS slope is greater than the LM slope. However, in this stable case the model does not have a useful economic meaning. One solution to this theoretical problem is to abandon the Keynesian adjustment mechanism and replace it with the Classical mechanism where the interest rate is determined in the goods market and production is determined in the money market. In this case, the IS-LM model is stable when the LM is steeper than the IS. Keywords: Economic thinking; macroeconomic theory; IS-LM model (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pcp:pucrev:y:2015:i:75:p:123-150 Access Statistics for this article Revista Economía is currently edited by Luis García More articles in Revista Economía from Fondo Editorial - Pontificia Universidad Católica del Perú Av. Universitaria 1801, San Miguel, Lima, Perú. Contact information at EDIRC. |
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