Selected Essays of Axel Leijonhufvud
Chapter 4: What was the matter with IS-LM?
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...
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