History of Political Economy Annual Supplement to Volume 36 (2004) 305-322
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The Strange Persistence of the IS-LM Model
Why has the IS-LM model persisted? In this essay I consider that question, along with the related, and in some ways more interesting, question of how the use of the IS-LM model has changed over time. I begin with some general issues about the persistence of IS-LM and how its treatment has changed, presenting some bibliometric evidence about the appearance of IS-LM in the literature over the last forty years. Then I look specifically at how the treatment of IS-LM has evolved from the 1960s until today, comparing a 1960s intermediate macro text with a modern intermediate text. Finally, I relate that discussion to some thoughts about the future of the IS-LM model.
Some General Comments on the Persistence of IS-LM
IS-LM analysis is a creature of pedagogy, and to understand its persistence one must understand the nature of economic pedagogy in the intermediate macro course, where the IS-LM model predominates. Since just about every economics student takes intermediate macro, just about every economist has taken intermediate macro, and so as long as IS-LM continues to be used in that course, IS-LM will retain its central role in rough-and-ready discussions of macro policy. IS-LM provides a common framework (the "trained intuition") that economists can use to discuss macro policy, as suggested by James Tobin (1980), Robert Solow (1984), and others. [End Page 305]
To say that the IS-LM model has persisted is not to say that its use has remained the same or that it currently plays a central role in advanced discussions of macroeconomic policy and theory. In the 1960s, it did play a significant role in both theoretical and empirical discussions of macro, but that is no longer true, which means that the model's use has changed considerably over the last forty or fifty years. Today IS-LM has a limited range of applicability. For example, it does not appear in the principles texts, whereas back in the 1960s it could be found in some high-level principles texts and in appendixes to others. Even the AE/AP building block of the IS-LM model is disappearing from the intro texts and is being replaced with the AS/AD model.1
Another example of its limited range is that modern theoretical debates in top journals make little reference to the IS-LM model. For example, in the two-volume Handbook of Macroeconomics (Taylor and Woodford 1999), the term IS-LM is hardly mentioned, and no discussion of policy or theoretical issues is centered on it. Similarly, other than sometimes being referenced in a review of intermediate macro, graduate courses in macro at top schools seldom mention this model.2
There are attempts to translate modern work into the IS-LM framework, such as we see in the work of Bennett McCallum and Edward Nelson (1999), Tack Yun (1996), or Richard Clarida, Jordi Gali, and Mark Gertler (1999). But the foundation of their models is in dynamic general equilibrium theory, and the translation into IS-LM is not central to their analysis. The translation is done simply to give policy-oriented economists a way to relate their conclusions to an IS-LM framework. It is the underlying dynamic general equilibrium model, and not the translation of that debate into the IS-LM model, that is central to modern theoretical debates.3 [End Page 306]
The current situation is in marked contrast to the 1960s when both policy debates and theoretical debates were centered on the IS-LM model. In the 1960s, what one learned in intermediate macro provided a foundation for what one learned in upper-level and graduate courses. IS-LM was the end of the line—providing a synthesis of the Keynesian and classical models, which were central to the policy debates and higher theoretical work in economics. Since one learned IS-LM in the...