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THE TRIBAL DISLIKE OF JOHN HICKS AND IS-LM: WEDNESDAY HOISTED FROM THE ARCHIVES FROM 1 1/2 YEARS AGO: HISTORY OF ECONOMIC THOUGHT WEBLOGGING by DeLong

In monetary economics the simplest model is the bare two-good one-period quantity theory of money model:

• There is a peculiar commodity called "money".

• Total economy-wide spending is roughly proportional to it.

There are lots of valid insights to be gained from this model. But does it help us understand the real world today enough to satisfy us? No: the money stock is very large, but the flow of spending is not.
So we complicate the model:

• The incentive to spend money is lower when the short-term safe nominal interest rate is low.

• For each counterfactual level of the money stock there is a curve, with total spending on the horizontal axis and the short-term safe nominal interest rate on the vertical axis, that tells us how the level of spending varies with counterfactual variations in the short-term safe nominal interest rate.

• We call this family of curves--one for each counterfactual level of the money stock--the LM relationship.

• But this is not a complete model: we need to figure out what the short-term safe nominal interest rate is. So we add a bond market to our model and look at its equilibrium level of asset prices to pin down the interest rate.

• We call that pinning-down the interest rate by the name of the IS relationship.

• That is the IS-LM model.

It is a three-good one-period model.

(post-Keynesian?) commenter chris:

John Hicks: IS-LM: An Explanation