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Understanding IS-LM Model Dynamics and Policy Mix in Goods and Financial Markets

This lecture reviews how to find equilibrium in goods and financial markets, focusing on monetary and fiscal policy dynamics. It provides examples like Y2K and Prudence, explores the impact of Expansionary Monetary Policy, and delves into the interaction between IS and LM curves. The Clinton-Greenspan policy mix and German unification are discussed as relevant episodes. The dynamics of monetary contraction in the IS-LM model are also examined through scenarios of slow goods market and fast financial markets. Various facts and figures are referenced to illustrate key points.

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Understanding IS-LM Model Dynamics and Policy Mix in Goods and Financial Markets

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Presentation Transcript

  1. Lecture 6: IS-LM (2) • Review: Find equilibrium in goods and financial markets (Y,i). Monetary and fiscal policy • Episodes • Some dynamics • Facts

  2. Monetary Policy s’ s M M i d M M Money

  3. Equilibrium in M rather than Central Bank M Ms = H c + (1-c) Ms = Md => H 1 = P Y L(i) c + (1-c) Examples: a) Y2k ; b) Prudence; c) OMO with multiplier

  4. LM LM i i i1 * i0 * Md(Y1) Md(Y0) Y1 Y0 Y M A) Expansionary Monetary Policy; B) Y2k

  5. IS OLD: Y = C(Y-T) + I + G I = I(Y,i) + - IS: Y = C(Y-T) + I(Y,i) + G Why IS?

  6. IS Z(i0) Z(i1) i0 A) Fiscal Policy; B) “Optimism” i1 IS Y Y0 Y1

  7. IS-LM Model i LM IS Y A) Fiscal policy; B) Monetary policy; C) Mix

  8. Episodes • The Clinton-Greenspan policy mix • German unification

  9. Dynamics i LM’ LM IS Y Monetary Contraction SLOW GOODS MARKET / FAST FINANCIAL MARKETS

  10. Facts • Insert Figure 5.11 • Insert Table 5.1

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