Krugman doesn’t understand IS-LM (Part 3)
But first, a word about my Kickstarter campaign to raise funds to develop Minsky, a tool for designing strictly monetary macroeconomic models:
There are only 3 days left to help Kickstart Minsky! We've raised $63,200 now, which puts us within striking distance of our first stretch goals:
About 1400 hours of total programming time will enable Russell to complete the "Mun" release, which will focus on improving the graphics and presentation aspects of the program.
Nathan will also be able to develop a version of Minsky for iPad and Android Tablets.
I'm also not about to give up hope that we might make the second stretch goal:
With twice as much as the original INET Grant, we should be able to complete stage 2 of Minsky—the "Quesnay" release named in honor of the person I regard as the world's first dynamic economist, Francois Quesnay—in which the platform could support the construction of multi-bank model of the financial sector, and a multi-commodity model of production.
Krugman doesn't understand IS-LM (Part 3)
Krugman's explanation of our crisis today is straight from the pages of John Hicks's 1937 explanation of the Great Depression (though curiously, Hicks himself didn't mention the actual state of the global economy at all in his 1937 paper), which attempted to explain the relationship between interest rates, and real output in goods and services and money markets. Firstly, the LM curve, (representing Liquidity Preference – Money Supply) is horizontal at the "zero lower bound", since when nominal rate of interest reaches zero, there's no point in buying bonds – it's wiser to keep your money in cash. And secondly, during a Depression, private demand can fall so much that the intersection of IS (representing Investment – Saving) and LM occurs at a level of GDP well below the full employment level. The economy is in an equilibrium with involuntary unemployment (see figure 7).