TY  - JOUR
AU  - McCallum,Bennett T.
AU  - Nelson,Edward
TI  - An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5875
PY  - 2000
Y2  - March 2000
UR  - http://www.nber.org/papers/w5875
L1  - http://www.nber.org/papers/w5875.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu

Edward Nelson
Federal Reserve Board
Mail Stop 76, Monetary Affairs
20th and C Streets, N.W.
Washington, DC 20551
E-Mail: edward.nelson@frb.gov
AB  - 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.
ER  -