Krugman doesn’t understand IS-LM (Part 2)
This is the second installment in a 4 part post; click this link for the first part. But first, a word about my Kickstarter campaign to raise funds to develop Minsky, a tool for designing strictly monetary macroeconomic models:
There are only 5 days left to help Kickstart Minsky! We’ve raised $61,500 now, which puts us within striking distance of our first stretch goals:
$100,000
About 1400 hours of total programming time will enable Russell to complete the “Mun” release, which will focus on improving the graphics and presentation aspects of the program.
Nathan will also be able to develop a version of Minsky for iPad and Android Tablets.
I’m also not about to give up hope that we might make the second stretch goal:
$250,000
With twice as much as the original INET Grant, we should be able to complete stage 2 of Minsky—the “Quesnay” release named in honor of the person I regard as the world’s first dynamic economist, Francois Quesnay—in which the platform could support the construction of multi-bank model of the financial sector, and a multi-commodity model of production.
Krugman doesn’t understand IS-LM (Part 2)
Now the bad times are back, Paul Krugman is trying resuscitate IS-LM, a model published by John Hicks in 1937 that seeks to explain the relationship between interest rates, and real output in goods and services and money markets. I argue that Krugman should leave it dead – not for the reasons that the new classicals killed it off (being inconsistent with neoclassical microeconomics is a plus in my books) but because it’s a lousy model for what we’re experiencing right now. There’s no better way to show this than to outline how Krugman is trying to use it, and show that he gets it wrong.
Krugman’s Derivation
Krugman describes his derivation of IS-LM in two posts that feature as “essential reads” on his blog: ‘IS-LMentary‘ and ‘Liquidity preference, loanable funds, and Niall Ferguson (wonkish)‘. He portrays IS-LM as “a way to reconcile two seemingly incompatible views about what determines interest rates”.
Click here to read the rest of this post: http://www.businessspectator.com.au/article/2013/3/8/interest-rates/where-krugman-went-wrong#ixzz2NNtecktk
2013-03-12 20:47:22
Source: http://www.debtdeflation.com/blogs/2013/03/13/krugman-doesnt-understand-is-lm-part-2/
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