I have become more and more embarrassed at having to teach the IS-LM model. The IS curve is fine, but the LM curve is not. The reason is obvious enough: central banks do not operate a fixed money supply policy. It would be nice to tell students that the fiction that the monetary authorities fix money is a harmless fairy story, but I do not believe this. Here are just three mistakes or confusions caused by using the LM curve.
Read it at mainly macro
Why introductory macroeconomics should ditch the LM curveFor teachers and students of economics
by Simon Wren-Lewis | Professor of Economics, Oxford University
IS curve is fine? Then why are corporations saving trillions and not investing at ZIRP?
Favorite quote:
I sometimes say to master’s students just starting the core macro course that they will spend some time learning about the same stuff as they did when they were undergraduates: inflation, unemployment, business cycles. The key difference is that what they learn will only be 5 or 10 years out of date, compared to material that is 30 years out of date for undergraduates. Strange, but unfortunately true.
When I read stuff like this I seriously want a refund on my education. The whole IS/LM model is bunk. And he doesn't even know it. Why tinker with fixing something that is so fundementally wrong?
ReplyDeleteHopefully, when Randy and Bill's macro textbook is published, this will start to go away.
ReplyDelete