EVENT: Economics Research Seminar

The ISLM model, introduced in 1936-37 to provide interpretations of Keynes's General Theory, subsequently emerged in its Hicks-Hansen form as the workhorse and trained intuition of post-war macroeconomists. However, ISLM is an essentially orthodox model based on Neoclassical foundations and fails completely as an adequate representation of central elements of Keynes's macroeconomic thought. This paper proposes IYLM as a replacement for ISLM, the new model being General Theory-compatible in that it is grounded only on key propositions in that work. Its purpose is to contribute, within the constraints of a two market framework, to the resuscitation of Keynes's macroeconomics as an alternative to the inadequacies of much current macroeconomics. The first part of the paper derives and explains the model, and argues that those sympathetic to The General Theory can accept the IYLM framework while simultaneously rejecting ISLM. The second part shows that Hicks-Hansen ISLM is based on an income-augmented form of orthodox loanable funds theory.