Summary of Romer 2000 - Article Example

Keynesian Macroeconomics without the LM Curve The IS-LM model, developed in the 1960’s, for a long time, has been a key tool of macroeconomic training. It is a critical instrument for understanding macroeconomic variations. Developed at a time when inflation was nonexistent, its conventions and interpretations, however, make it more appropriate to examining some subjects and environments than other models. About the subjects, monetary and fiscal policies that were critical in analyzing short-run fluctuations in the 1970’s are no longer effective.

Similarly, as concerns the environment, a key adjustment is that most central banks today do not give great attention to financial aggregates in directing policy (Romer, p 149).In the light of recent advances, it is deemed that time has come to re-evaluate the suitability of using the model in analyzing short-run fluctuations for the undergraduates. In addressing the shortfalls of the IS-LM model, a new theory is essential. A new model that replaces the LM curve composed with its supposition that the central bank marks the currency stream and that the bank monitors the interest rate tenet.

The new model avoids the impediments that sprout with IS-LM that comprises the real against the nominal interest proportion and inflation against the value level. It makes treatment of financial policy calmer by reduction of the worth of simultaneity, and by allowing growth to subtleties that are modest and rational.The IS-LM model describes the economy by the use of two relationships; the output and the interest rate. The output is about the goods in the market. It portends that a higher interest rate decreases the demand for goods at a specific income level.

It reduces the output level until the quantity of output demands equals the production quantity. It is the IS curve. The other relationship is about the currency fair. It portends that the quantity of cash needed or the liquidity requirement escalates with income and depreciates with the rate of interest (Romer, p 151). The model adopts a fixed price worth and so incapable of analyzing inflation. To include inflation analysis, aggregate supply was incorporated which birthed the present IS-LM-AS model.

It added the fact that greater output translates to steeper level of price. But was this model the best suited for analyzing current short-run fluctuations. The model assumed controversially that the level of price does not change and in time to disturbances. The model is found to be unreliable and impractical. To improve this is the IS-MP-IA model. The model uses an approach that the central bank charts an actual interest rate value rule. It acts in a particular way to ensure the actual interest rate perform as a function of macroeconomic variables like inflation plus output.

The model has many merits. Firstly, the postulation that the central bank charts an interest rate concept is more justifiable than the rule that targets currency supply. Even better, the new tactic describes monetary policy in the confines of a real rate of interest. It keeps inflation from climbing or deteriorating without certainty. The real interest rate is also modest than the LM curve. The aggregate curve of demand clearly relays inflation and productivity (Romer, p 163). In conclusion, all the models stated above have their merits and shortfalls that can easily be noted.

Hence, it is more valuable for the undergraduates to learn all of them for detailed analysis involving all variables. However, the models must be kept simple and available to enthuse students into broad policy discussions. Most news pieces on the central banks’ pronouncements about rates of interests are more available than articles on money targets. It gives IS-MP-IA model greater merits for applicability in the Keynesians Macroeconomics.Works Cited Romer, David. "Keynesian Macroeconomics without the LM curve.

" Journal of Economic Perspectives (2000): 149-169.