Lecture 6: IS-LM (2)

• Review: Find equilibrium in goods and

financial markets (Y,i). Monetary and fiscal
policy
• Episodes
• Some dynamics

• Facts
 Monetary Policy

s s’
M M
i

d
M
M
Money
 Equilibrium in M rather than

Central Bank M

Ms = H

c + θ(1-c)

Ms = Md =>

H 1 = P Y L(i)
c + θ(1-c)
Examples: a) Y2k ; b) Prudence; c) OMO with multiplier
 LM

LM
i i
i1 *

i0 *
Md(Y1)

Md(Y0)
Y0 Y1 Y
M

A) Expansionary Monetary Policy; B) Y2k

 IS

OLD: Y = C(Y-T) + I + G

I = I(Y,i)
+-

IS: Y = C(Y-T) + I(Y,i) + G

Why IS?
 IS

Z(i0)

Z(i1)

i0
A) Fiscal Policy;
i1
IS B) “Optimism”

Y0 Y1 Y
 IS-LM Model

i LM

IS

A) Fiscal policy; B) Monetary policy; C) Mix

 Episodes

• The Clinton-Greenspan policy mix

• German unification
 Dynamics

i LM’
LM

IS

Monetary Contraction
SLOW GOODS MARKET / FAST FINANCIAL MARKETS
 Facts

• Insert Figure 5.11

• Insert Table 5.1