Source: http://bilbo.economicoutlook.net/blog/?p=35148
Excerpt from article:
"Students then spend hours in excruciating exercises where the gains in output from the rise in government spending are partially, wholly, or more than wholly offset by the loss of output from private investment as interest rates rise.
They then have moral intonations forced upon them about the relative merits of public spending (which is not ‘disciplined’ by the market) and private investment spending (which is assumed to be always efficient and highly productive.
The morality play ends with students being told that fiscal deficits are bad, force out good private investment and lead to lower efficiency and degraded outcomes for all.
Then the IS-LM framework is married up to another illegitimate framework – AS-AD – which completes the horror story – fiscal deficits end in accelerating inflation.
It is really an amazing con.
There is no educational content in studying the IS-LM framework except from an history of economic thought perspective. It has very little correspondence with the real world."
Paul Krugman's ideas are part of the problem |
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