The IS-LM Model: Its Role in Macroeconomics

Abstract

At the time of publication of J.M. Keynes' General Theory of Employment, Interest, and Money (New York or London, Harcourt Brace or Macmillan, 1936) the idea of mathematical modeling, especially in macroeconomics, was confined to a small group of mathematically-inclined economists, some of whom had just founded the Econometric Society. Ragnar Frisch, Michal Kalecki and a few others did for macroeconomics what Leon Walras and Vilfredo Pareto did for microeconomics; they formulated systems of equal numbers of equations and (endogenous) variables that would be able to determine the latter as solutions to simultaneous equations. They were seeking explanations of the business cycle during times of economic turmoil (stock exchange crashes and deep, prolonged depression).