Krugman doesn’t understand IS-LM (Part 2)

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This is the sec­ond install­ment in a 4 part post; click this link for the first part. But first, a word about my Kick­starter cam­paign to raise funds to devel­op Min­sky, a tool for design­ing strict­ly mon­e­tary macro­eco­nom­ic mod­els:

There are only 5 days left to help Kick­start Min­sky! We’ve raised $61,500 now, which puts us with­in strik­ing dis­tance of our first stretch goals:

$100,000

About 1400 hours of total pro­gram­ming time will enable Rus­sell to com­plete the “Mun” release, which will focus on improv­ing the graph­ics and pre­sen­ta­tion aspects of the pro­gram.

Nathan will also be able to devel­op a ver­sion of Min­sky for iPad and Android Tablets.

I’m also not about to give up hope that we might make the sec­ond stretch goal:

$250,000

With twice as much as the orig­i­nal INET Grant, we should be able to com­plete stage 2 of Min­sky—the “Ques­nay” release named in hon­or of the per­son I regard as the world’s first dynam­ic econ­o­mist, Fran­cois Ques­nay—in which the plat­form could sup­port the con­struc­tion of mul­ti-bank mod­el of the finan­cial sec­tor, and a mul­ti-com­mod­i­ty mod­el of pro­duc­tion.

Krugman doesn’t understand IS-LM (Part 2)

Now the bad times are back, Paul Krug­man is try­ing resus­ci­tate IS-LM, a mod­el pub­lished by John Hicks in 1937 that seeks to explain the rela­tion­ship between inter­est rates, and real out­put in goods and ser­vices and mon­ey mar­kets. I argue that Krug­man should leave it dead – not for the rea­sons that the new clas­si­cals killed it off (being incon­sis­tent with neo­clas­si­cal micro­eco­nom­ics is a plus in my books) but because it’s a lousy mod­el for what we’re expe­ri­enc­ing right now. There’s no bet­ter way to show this than to out­line how Krug­man is try­ing to use it, and show that he gets it wrong.

Krugman’s Deriva­tion

Krug­man describes his deriva­tion of IS-LM in two posts that fea­ture as “essen­tial reads” on his blog: ‘IS-LMen­tary’ and ‘Liq­uid­i­ty pref­er­ence, loan­able funds, and Niall Fer­gu­son (wonk­ish)’. He por­trays IS-LM as “a way to rec­on­cile two seem­ing­ly incom­pat­i­ble views about what deter­mines inter­est rates”.

Click here to read the rest of this post: http://www.businessspectator.com.au/article/2013/3/8/interest-rates/where-krugman-went-wrong#ixzz2NNtecktk