Abstract
A disequilibrium version of the standard IS-LM model is constructed and used to analyze the stability of the model. The main feature of the disequilibrium behavior turns out to be a spillover from the money market to the output market; if there is an excess demand for loanable funds (or an excess supply of bonds) firms will be unable to finance all of their desired investment, and aggregate demand will therefore be smaller than would otherwise be the case. This spillover has certain implications for the dynamic behavior of the model.
A previous version of this paper was entitled “A Disequilibrium Macroeconomic Model”. This work was supported in part by Bell Telephone Laboratories, Murray Hill, New Jersey and in part by the National Science Foundation.
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© 1978 The Scandinavian Journal of Economics
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Varian, H.R. (1978). The Stability of a Disequilibrium IS-LM Model. In: Strøm, S., Werin, L. (eds) Topics in Disequilibrium Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-03917-3_7
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DOI: https://doi.org/10.1007/978-1-349-03917-3_7
Publisher Name: Palgrave Macmillan, London
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