Hansen's Mistaken View on Keynes's Creation of the IS-LM Model: Where Hansen Went Wrong
24 Pages Posted: 26 Feb 2018
Date Written: February 15, 2018
A.Hansen essentially went wrong in his evaluation of Keynes’s work in the General Theory (GT;1936) that dealt with the Liquidity Preference function in chapters 13,14,15,and 21.His basic error occurs when he evaluates Keynes’s chapter 14 analysis on pp.179-183 that dealt with the fact that the neoclassical analysis was missing the liquidity preference function by using the wrong liquidity preference function on page 168 from chapter 13 instead of using the correct Liquidity Preference function from page 199 in chapter 15.The Liquidity Preference function from chapter 15 is defined for Y and r. It can only be analyzed in (r,Y) space. It is impossible to analyze in (r;Qm,Qs) space.
Keynes’s December, 1933 model of IS-LP(LM),presented to Keynes’s students, demonstrates that Hansen’s belief that the rate of interest for Keynes was determined only by the demand and supply of money was always false.
Keywords: IS-LM,IS-LP(LM),Reddaway,Champernowne,Keynes,chapter 21,chapter 15,Keynes's views of math
JEL Classification: B10,B12,B14,B16,B20,B22
Suggested Citation: Suggested Citation