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Department of Economics, WU (Wirtschaftsuniversität Wien) Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)

No 69:
Walras' Law and the IS-LM Model. A Tale of Progress and Regress.

Hansjoerg Klausinger ()

Abstract: This paper deals with the integration of Walras' law into Keynesian macroeconomics and the attempts at a consistent specification of period models (beginning- vs. end-of-period-equilibrium). Three examples are examined where neglect of a consistent specification led to erroneous results: (1) the identication of the IS-condition with equilibrium of the "flow market" for bonds, (2) superficial treatments of the liquidity trap, and (3) the assumptions on the stochastic structure of monetary and real shocks in determining the optimal monetary instrument.

Keywords: Walras' Law; IS-LM-model; beginning-of-period-equilibrium; end-of-period-equilibrium; liquidity trap; optimal monetary instrument; (follow links to similar papers)

JEL-Codes: B22; E52; (follow links to similar papers)

May 2000

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