@techreport{NBERw5875,
 title = "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis",
 author = "Bennett T. McCallum and Edward Nelson",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "5875",
 year = "2000",
 month = "March",
 URL = "http://www.nber.org/papers/w5875",
 abstract = {This paper asks whether relations of the IS-LM type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations.  The main result is that only one change -- the addition of a term regarding expected future income -- is needed to make the IS function match a fully optimizing model, whereas no changes are needed for the LM function.  This modification imparts a dynamic, forward-looking aspect to saving behavior and leads to a model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications.  Theoretical applications concerning price level determinacy and inflation persistence are included.},
}