Read the whole post, here is one excerpt:
…many countries now operate under an inflation targeting framework, in which responding to inflation is the key feature of the policy rule. In this environment, depicting policy as a relationship between “Y” and “i” misses what’s really going on—better to abandon the upward-sloping LM curve altogether and use a simple horizontal line to depict the current policy rate. I’m not alone in this sentiment.
David Romer wrote an entire piece for the JEP in 2000 called Keynesian Macroeconomics without the LM Curve. (As the title suggests, he shares my feelings on the matter.) Tyler Cowen puts this at #6 on his list of grievances. It’s a pretty obvious point—yet, for reasons I don’t entirely understand, we still print thousands of undergraduate textbooks a year with LM front and center.
Matt is an economics Ph.d student at MIT and an expert in macroeconomics.
Here is a good quotation from the above-cited David Romer piece (Romer, by the way, is not a member of my tribe, in fact he is a tenured professor at Berkeley):
In short, recent developments work to the disadvantage of IS-LM. This observation suggests that it is time to revisit the question of whether IS-LM is the best choice as the basic model of short-run fluctuations we teach our undergraduates and use as a starting point for policy analysis. The thesis of this paper is that it is not.