The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

IS–LM in Modern Macro

  • Edward Nelson
Reference work entry


The IS–LM framework is associated with traditional macroeconomics, but versions of IS and LM functions can be justified using dynamic general equilibrium models that assume optimizing behaviour on the part of the private sector. The baseline version of these optimizing IS–LM relationships is discussed. Relative to the traditional IS–LM specification, the IS relationship in the optimizing IS–LM framework involves an extra term, which reflects the dependence of real aggregate demand on the expected level of spending next period. This extra term is implied by the intertemporal behaviour of households.


Aggregate demand Dynamic stochastic general equilibrium (DSGE) models Infinite horizons IS–LM in modern macro IS–LM model Monetarism 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Edward Nelson
    • 1
  1. 1.