The IS-IR Model: A Modern Macroeconomics Textbook Framework
The paper argues the IS LM framework misrepresents modern monetary economies. It replaces LM with an IR line. The central bank sets the policy rate and banks create money, overturning quantity view. A lending rate equals policy plus a credit spread, letting the model track shocks, spreads, fiscal monetary interactions, and zero lower bound. Results find no automatic fiscal crowding out and incomplete pass through. Strengths are realism and clarity. Weaknesses are validation and microfoundations.
What it examines
The paper challenges IS-LM’s exogenous money premise and endogenous rate. Using Post-Keynesian theory and central bank practice, it proposes an IS-IR model: keep IS for goods market, replace LM with a horizontal policy-rate line, and make investment depend on the lending rate (policy rate plus credit spread).
What it concludes
IS-IR better matches modern monetary operations, clarifies fiscal effects without automatic crowding out, and embeds credit spreads, aiding analysis of financial shocks and the ZLB. Applications: teaching, policy design, macroprudential coordination, and crisis evaluation. Limits invite empirical work on spread dynamics and pass-through. Recommendation: replace IS-LM in textbooks.
Evidence objects
Paper argues IS--LM misrepresents economies, proposing an IS--IR model with a horizontal policy-rate line and endogenous bank money. If the policy rate is exogenous, LM loses validity, overturning quantity-money views.
key_findings bullet 1 · key_findings · validation V0
Model introduces a lending ratepolicy rate plus credit spreadto capture shocks, monetary-fiscal interactions, and ZLB effects. Results: no fiscal crowding out, incomplete pass-through, procyclical spreads moving IS independently of policy.
key_findings bullet 2 · key_findings · validation V0
Method blends Post-Keynesian horizontalism, central bank operations, and lessons from failed money targeting and unstable money demand. Strengths: institutional realism, clarity. Weaknesses: limited quantification, no calibration/dynamics, microfoundations, debated spreads, spillovers.
key_findings bullet 3 · key_findings · validation V0
The paper proposes replacing IS-LM with an IS-IR framework treating policy rates as exogenous and money as endogenous, aligning with Post-Keynesian and central banking. It synthesizes established critiques, echoes IS-MP/New Keynesian rules, and adds pedagogical clarity and endogenous credit spreads, aiding ZLB discussion. Interesting yet modestly original, limited for finance/AI.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- … The IS–IR model retains the IS curve's goods-market … credit, recognizing that investment decisions are influenced by an e ective lending rate that includes procyclical credit …
Source row: 1965 · abstract type: snippet