Equilibrium and Disequilibrium Interpretations of the IS-LM Model

Gary Smith

No 461, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: There is a considerable tension in neo-Keynesian macroeconomics as to whether the familiar IS-LM analysis should be interpreted as a description of equilibrium or disequilibrium. The present paper shows how the IS-LM model can be used for either purpose. The first section provides the preliminaries for the model of disequilibrium behavior that I will use. The second section lays out the sectoral notional and effective demands. The third section gives the equilibrium solution while the fourth and fifth sections give excess supply and excess demand solutions respectively.

Pages: 32 pages
Date: 1977
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Published in De Economist (1980), 497-529

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