A Wicksellian Alternative to the Is-Lm Model
35 Pages Posted: 5 Jul 2005
Date Written: May 2005
This paper proposes a Wicksellian alternative to the IS-LM/AS-AD model that serves as the centerpiece of most intermediate macroeconomics textbooks. The model has a simple, intuitive structure that is consistent with modern monetary theory and the actual operating procedures of the Federal Reserve. The model centers on the market for bank reserves, the term structure of interest rates, the IS relationship, and the AS or Phillips curve relationship. The model allows for a simpler analysis of monetary policy than the traditional IS-LM/AS-AD model and is more in tune with what students encounter in the popular media. It can be used to analyze a number of interesting issues in monetary policy that are difficult to handle in the IS-LM/AS-AD framework, including the effect of anticipated changes in interest rates, the effect of anticipated budget deficits, and the optimal monetary policy response to changes in inflation expectations. The model can easily be simplified for use in a principles course or extended for use in upper-level macroeconomics courses.
JEL Classification: A2, E1, E5
Suggested Citation: Suggested Citation