Macroeconomic Instability and Coordination

Macroeconomic Instability and Coordination

Selected Essays of Axel Leijonhufvud

Economists of the Twentieth Century series

Axel Leijonhufvud

Axel Leijonhufvud has made a unique contribution to the development of macroeconomic theory. This volume draws together his insightful essays dealing with the extremes of economic instability: great depressions, high inflation and the transition from socialism to a market economy. In several of the papers, Leijonhufvud brings a neo-institutionalist perspective to the problems of coordination in economic systems.

Chapter 4: What was the matter with IS-LM?

Axel Leijonhufvud

Subjects: economics and finance, history of economic thought


4. What was the matter with IS–LM? At a conference on ‘Recent Developments in Macroeconomics’, elementary IS–LM might be a somewhat unexpected topic. IS–LM, after all, has been around for a while. It ruled research for 30 years or more, and, in the teaching of macroeconomics, a better mouse-trap has still to be invented. For the last fifteen years or so, however, it has been out of favor even with many economists who do not quite know what to put in its place. And in the last decade, theoretical research in macroeconomics has moved away from this frame of reference. Why are we bent on abandoning IS–LM? This would seem to be a question to which we ought to have a clear answer. An answer is needed for the appraisal of ‘recent developments’. Do fix-price temporary general equilibrium models solve (or successfully avoid) the problems we had with IS–LM? Do rational expectations models? Well – what were those problems? I Different people are apt to have different answers to that question. Every teacher of macroeconomics has his own list of ‘troubles’ with IS–LM. But almost all of those one hears frequently mentioned are surely remediable deficiencies. Taking inventory of the most popular complaints does not seem a promising tack, therefore. My title does not ask what is wrong with IS–LM. We are not looking for some simple error or omission. Omissions would have been remedied long ago. Fatal error is inconsistent with the...

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information