The IS-LM Model of Macroeconomic Equilibrium and the Monetarist Controversy

Abstract

This paper highlights the issue of whether government bonds are net wealth as an important one in the monetarist controversy. In particular it is shown that the standard IS-LM model and its conclusions arise as a special case of a more general macroeconomic model which results when government bonds are fully perceived as collective wealth. When, however, the tax liabilities required to service that debt are fully capitalized, a model with monetarist conclusions emerges.