The IS-LM-BB: a model of unconventional monetary policy

Waldo Mendoza

No 2013-366, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: The Monetary policy of the United States has not been the same since the 2008-2009 international crisis. Following the crisis, given that the federal funds interest rate - the conventional monetary policy instrument - fell to almost zero, the Federal Reserve (FED) had to resort to two unconventional instruments: Firstly, an announcement on the future trajectory of the short-term interest rate. Secondly, direct intervention in the long-term bond market. The objective of this article is to extend the IS-LM model devised by Hicks (1937), to incorporate American monetary policy innovations. This updated model, unlike IS-LM, takes into account that the FED administers the short-term interest rate, not monetary supply, which is endogenous. On the other hand, so as to address quantitative easing, a long-term bond market is added to the IS-LM —in which there only exists a short-term bond market— by resorting to Tobin (1981). This article shows that the old models and the old methods remain very useful in dealing with contemporary macroeconomic problems.

Keywords: unconventional monetary policy; liquidity trap; IS-LM model; política monetaria no convencional; trampa de liquidez; modelo IS-LM (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013
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