There are two fundamental types of conceptual model used to express theoretical assumptions: the first is mathematical and the second is conceptual.
Conceptual models have generally fared better than the mathematical ones with respect to policy for a variety of reasons, the basic one being that they can handle more kinds and orders of variables that are relevant, both quantitative and qualitative. Evidence? Keynes and the New Deal.
Krugman is specifically throwing Keynes under the bus? Or does Krugman think that the IS-LM model captures the essence of the General Theory?
Of course, monetarists will say that Keynesianism broke down with stagflation and monetarism repaired the lacuna with its math-based analysis — that showed that what happened in the financial crisis was impossible, or at least highly unlikely.
Those taking a broader view warned otherwise. Like those influenced by Minsky's analysis.
What amazes me is that monetarists think that the policy rate is the single lever that moves the entire economy, which is neatly depicted in the IS-LM model.
3 comments:
"What amazes me is that monetarists think that the policy rate is the single lever that moves the entire economy, which is neatly depicted in the IS-LM model"
I don't think that's what monetarists believe. New Keynesians maybe.
The way I understand it monetarism holds that the central bank controls the supply of money either exogenously through quantity of reserves and money multiplier, or in an endogenous system through the "supply function" of money, that is set by the policy rate.
Nicely said Tom. I'd say the latter type of monetarists are the ones to watch out for. The former, old school, Friedman-rule monetarists are irrelevant.
The "endogenous money monetarists" (not a real label but let's call them that for now) believe that the CB "creates" money whenever its policy rate is below the natural rate of interest, wherever that may be according to their model.
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