From the comments, on Sims and IS-LM

This is from E. Barandiaran and it relates to recent controversies in the blogosphere:

This is the last section of a Sims’s paper on the ISLM model (1998):

4. Conclusion

• Keynesian reasoning ought to be essentially forward looking and to emphasize expectational factors in savings and investment decisions. Traditional ISLM hides and inhibits development of this aspect of Keynesian modeling.

• ISLM ignores connections between monetary and fiscal policy that are enforced by the government budget constraint. In many policy contexts, this is a major gap.

• It remains to be seen whether there is a way to capture these aspects of Keynesian modeling in a package as neat and non-technical as ISLM, but that should not be an excuse for continuing to make ISLM the core of our teaching and informal policy discussion.

and this is the abstract

Abstract. ISLM inhibits attention to expectations in macroeconomics, going against the spirit of Keynes’s own approach. This can lead to mistaken policy conclusions and to unnecessarily weak responses to classical critiques of Keynesian modeling. A coherent Keynesian approach, accounting for endogenous expectations, implies very strong effects of monetary and fiscal policy and leads to greater attention to the role of the government budget constraint in making the effects of monetary policy conditional on prevailing fiscal responses, and vice versa.


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