The IS-LM Model, Portfolio Theory and the Monetarist Controversy

Neil Bruce

Working Paper from Economics Department, Queen's University

Abstract: This paper examines portfolio theory underpinnings of the familiar IS and LM model to discover a common ground to determine the differences separating the monetarist and income-expenditure approaches. It is emphasized that the LM curve represents portfolio balance conditions rather than full wealth equilibrium. From the general model, the conventional IS-LM equations correspond to a special case of dynamic wealth adjustment where government bond are fully perceived as net wealth by the private sector. In contrast, when they are not perceived as net wealth, the model reduces to one with purely monetarist conclusions. Finally, a simplified treatment of IS-LM equilibrium in an accumulating economy is presented.

Pages: 33
Date: 1975
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:186

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