TITLE:
IS-LM Paradigm in Macroeconomics: A Survey and Evaluation
AUTHORS:
Haiming Li, Xiao Wu
KEYWORDS:
IS-LM Paradigm, Rational Expectationis-LM Model, IS-LM(MP)-NPC Model
JOURNAL NAME:
Theoretical Economics Letters,
Vol.5 No.2,
April
22,
2015
ABSTRACT: This paper analyzes
many serious defects existing in traditional aggregate demand/aggregate supply paradigm
based on IS-LM model. Those defects cause the situation that IS-LM model declines
gradually, but it is still not dead, and continuously revives through
modification. This paper distinguishes from rounds of modification on
traditional aggregate demand/aggregate supply paradigm. The first round of
modification was just introducing the dynamic ad hoc IS-LM model of rational expectation which started from the
end of 1970s and the beginning of 1980s. Because the micro-foundation problems
are not solved and the rational expectation carries out extreme judgment on
monetary neutrality and ineffectiveness of macroeconomic policy, the first
modification fails to realize big success. The second round of modification is
just happening; through introducing rational expectation and New Phillips Curve
(NPC), the powerful improvement has been made in micro-foundation, dynamic
form, and monetary policy rules, and the model is called IS-LM/ MP-NPC model.
This paper also points out some limitations which are not solved in the second
modification.