Abstract
The IS–LM framework is associated with traditional macroeconomics, but versions of IS and LM functions can be justified using dynamic general equilibrium models that assume optimizing behaviour on the part of the private sector. The baseline version of these optimizing IS–LM relationships is discussed. Relative to the traditional IS–LM specification, the IS relationship in the optimizing IS–LM framework involves an extra term, which reflects the dependence of real aggregate demand on the expected level of spending next period. This extra term is implied by the intertemporal behaviour of households.
This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume
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Nelson, E. (2008). IS–LM in Modern Macro. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_1949-1
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DOI: https://doi.org/10.1057/978-1-349-95121-5_1949-1
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