IS–LM Analysis

Abstract

The original IS–LM model was introduced by Sir John Hicks as a framework for clarifying the relationship between Keynes’s theory and that of his predecessors. (In Hicks’s famous paper, ‘Mr Keynes and the “Classics”’ (1937), however, the now so familiar diagram bore the notation SI-LL.) Further attempts to define Keynes’s theoretical contributions precisely within the basic IS–LM structure were made by Alvin H. Hansen (e.g. Hansen 1953), Franco Modigliani (1944), Lawrence Klein (1947) and Don Patinkin (1948) among others. IS–LM became in this way not only the vehicle for popularizing Keynesian ideas and the mainstay of macroeconomic textbooks but, for several decades, the main organizing conception for macroeconomics in general. Even the very large macroeconometric models of several hundred equations were generally disaggregated IS–LM structures. When Modigliani (1963) surveyed the major developments in macroeconomics in the early 1960s, he did so by presenting an ‘updated’ IS–LM model. As late as 1971, Milton Friedman and his critics debated the issues between Monetarism and Keynesianism in accordance with IS–LM groundrules (cf. Gordon 1973). From the late 1970s on, the grip of IS–LM on the macrotheoretical imagination began to loosen as the rational expectations movement came to rely on smallscale general equilibrium and game-theoretic models instead.