Money and the Transmission Mechanism in the Optimizing IS-LM Specification

Edward Nelson

No 3898, CEPR Discussion Papers from Centre for Economic Policy Research

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 models that include the optimizing IS-LM specification are legitimate vehicles for dynamic analysis: the evolution of nominal wages and prices is treated endogenously, and there is full recognition of the intertemporal nature of households? saving decisions. The optimizing version of IS-LM analysis remains vulnerable, however, 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; Optimizing is-lm specification; Transmission mechanism (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2003-05
New Economics Papers: this item is included in nep-hpe, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Journal Article: Money and the Transmission Mechanism in the Optimizing IS-LM Specification (2004)
Working Paper: Money and the transmission mechanism in the optimizing IS-LM specification (2003)
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