The end-of-period IS-LM model revisited

Abstract

McCaleb and Sellon (M-S)make three points about my end-of-period IS-LM modelJ First, they argue that a fiscal stimulus will have the usual effects if the end-of-period stock demand for money is assumed to be a decreasing function of the interest rate. Second, they point out that if the stock and flow components of asset demands are treated symmetrically, then the impact of a tax change is ambiguous for the beginning as well as the end-of-period analysis. Finally, they point out that the Benavie model is in disagreement with the Patinkin model since the latter does not incorporate any of the saving flow into the end-of-period stock asset demand while Benavie does. We consider these points in turn. M-S are correct in pointing out that a sufficient condition for goverfiment spending to have the conventional effects is for the end-ofperiod stock demand for money to be inversely related to the interest rate. This follows directly from the Benavie model as a special case. Unfortunately, it is only a special case for we have no assurance-nor any estimates to my knowledge-that the end-of-period demand for money is inversely related to the interest rate. Consider the effect working in the opposite direction: a ceteris paribus rise in the interest rate will decrease real wealth which will stimulate saving at the expense of consumption and hence the demand for money. Be that as it may, it is interesting to explain intuitively why a change in government spending will have the usual effects if the end-of-period demand for money is a de-