Editing IS–LM model (section)

==History==
The IS–LM model was introduced at a conference of the [[Econometric Society]] held in Oxford during September 1936. [[Roy Harrod]], [[John Hicks|John R. Hicks]], and [[James Meade]] all presented papers
describing [[mathematical model]]s attempting to summarize [[John Maynard Keynes]]' ''[[General Theory of Employment, Interest, and Money]]''.<ref name="Hicks1937" /><ref>{{cite journal |last=Meade |first=J. E. |title=A Simplified Model of Mr. Keynes' System |journal=[[Review of Economic Studies]] |volume=4 |issue=2 |pages=98–107 |year=1937 |jstor=2967607 |doi=10.2307/2967607 }}</ref> Hicks, who had seen a draft of Harrod's paper, invented the IS–LM model (originally using the [[abbreviation]] "LL", not "LM"). He later presented it in
"Mr. Keynes and the Classics: A Suggested Interpretation".<ref name="Hicks1937">{{cite journal |last=Hicks |first=J. R. |year=1937 |title=Mr. Keynes and the 'Classics': A Suggested Interpretation |journal=[[Econometrica]] |volume=5 |issue=2 |pages=147–159 |jstor= 1907242|doi=10.2307/1907242}}</ref> Hicks and Alvin Hansen developed the model further in the 1930s and early 1940s,<ref name=blanchard/>{{Rp|527}} Hansen extending the earlier contribution.<ref>{{cite book |last=Hansen |first=A. H. |year=1953 |title=A Guide to Keynes |url=https://archive.org/details/guidetokeynes0000hans |url-access=registration |location=New York |publisher=McGraw Hill |isbn=9780070260467 }}</ref>
The model became a central tool of macroeconomic teaching for many decades. Between the 1940s and mid-1970s, it was the leading framework of macroeconomic analysis.<ref>{{cite book |last=Bentolila |first=Samuel |chapter=Hicks–Hansen model |title=An Eponymous Dictionary of Economics: A Guide to Laws and Theorems Named after Economists |publisher=Edward Elgar |year=2005 |isbn=978-1-84376-029-0 }}</ref> It was particularly suited to illustrate the debate of the 1960s and 1970s between Keynesians and monetarists as to whether fiscal or monetary policy was most effective to [[Stabilization policy|stabilize the economy]]. Later, this issue faded from focus and came to play only a modest role in discussions of short-run fluctuations.<ref name=Romer>{{cite journal |last1=Romer |first1=David |title=Keynesian Macroeconomics without the LM Curve |journal=Journal of Economic Perspectives |date=1 May 2000 |volume=14 |issue=2 |pages=149–170 |doi=10.1257/jep.14.2.149 |url=https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.14.2.149 |access-date=9 November 2023 |language=en |issn=0895-3309}}</ref>  

The IS-LM model assumes a fixed price level and consequently cannot in itself be used to analyze inflation. This was of little importance in the 1950s and early 1960s when inflation was not an important issue, but became problematic with the rising inflation levels in the late 1960s and 1970s, which led to extensions of the model to also incorporate [[aggregate supply]] in some form, e.g. in the form of the [[AD–AS model]], which can be regarded as an IS-LM model with an added supply side explaining rises in the price level.<ref name=Romer/>

One of the basic assumptions of the IS-LM model is that the central bank targets the money supply.<ref name=Romer/> However, a fundamental rethinking in central bank policy took place from the early 1990s when central banks generally changed strategies towards targeting inflation rather than money growth and using an interest rate rule to achieve their goal.<ref name=blanchard>{{cite book |last1=Blanchard |first1=Olivier |title=Macroeconomics |date=2021 |publisher=Pearson |location=Harlow, England |isbn=978-0-134-89789-9 |edition=Eighth, global}}</ref>{{Rp|507}} As central banks started paying little attention to the money supply when deciding on their policy, this model feature became increasingly unrealistic and sometimes confusing to students.<ref name=Romer/> [[David Romer]] in 2000 suggested replacing the traditional IS-LM framework with an [[IS/MP model|IS-MP]] model, replacing the positively sloped LM curve with a horizontal MP curve (where MP stands for "monetary policy"). He advocated that it had several advantages compared to the traditional IS-LM model.<ref name=Romer/> [[John B. Taylor]] independently made a similar recommendation in the same year.<ref>{{cite journal |last1=Taylor |first1=John B. |title=Teaching Modern Macroeconomics at the Principles Level |journal=American Economic Review |date=May 2000 |volume=90 |issue=2 |pages=90–94 |doi=10.1257/aer.90.2.90 |url=https://www.aeaweb.org/articles?id=10.1257/aer.90.2.90 |access-date=18 November 2023 |language=en |issn=0002-8282|url-access=subscription }}</ref> After 2000, this has led to various modifications to the model in many textbooks, replacing the traditional LM curve and story of the central bank influencing the interest rate level indirectly via controlling the supply of money in the money market to a more realistic one of the central bank determining the policy interest rate as an exogenous variable directly.<ref name=blanchard/>{{Rp|113}}<ref>{{cite book |last1=Romer |first1=David |title=Advanced macroeconomics |page=262-264 |date=2019 |publisher=McGraw-Hill |location=New York, NY |isbn=978-1-260-18521-8 |edition=Fifth}}
</ref><ref name=SWJ>{{cite book |last1=Sørensen |first1=Peter Birch |last2=Whitta-Jacobsen |first2=Hans Jørgen |title=Introducing advanced macroeconomics: growth and business cycles |page=606 |date=2022 |publisher=Oxford University Press |location=Oxford, United Kingdom New York, NY |isbn=978-0-19-885049-6 |edition=Third}}</ref>

Today, the IS-LM model is largely absent from macroeconomic research, but it is still a backbone conceptual introductory tool in many macroeconomics textbooks.<ref>{{cite journal |first=David |last=Colander |author-link=David Colander |title=The Strange Persistence of the IS-LM Model |journal=History of Political Economy |volume=36 |issue=Annual Supplement |year=2004 |pages=305–322 |url=http://muse.jhu.edu/journals/history_of_political_economy/v036/36.5colander.pdf |doi=10.1215/00182702-36-suppl_1-305|citeseerx=10.1.1.692.6446 |s2cid=6705939 }}</ref><ref>{{cite web
|title=The Macroeconomist as Scientist and Engineer
|last=Mankiw |first=N. Gregory
|date=May 2006
|url=http://scholar.harvard.edu/files/mankiw/files/macroeconomist_as_scientist.pdf
|page=19
|access-date=2014-11-17}}</ref>