The IS/MY model

The IS/MY model is a very simple tool that builds on the sectoral identity (Sp – I ) + ( T – G) = (EX – IM). The change in debt of the private sector plus the change in debt of the private sector must equal the change in foreign debt. A change in debt connects to the real economy via the investment (private sector), government spending (public sector) and net export (external sector) channel. This provides a link between the activities on the financial side of the economy and that of the real side. This simple model while reduced to the essential identity still should be able to explain the impact of changes in debt of all sectors: private, public and external. While not being a stock-flow consistent model it nevertheless points to issues related to the sustainability of debt. It is simple enough to be used in teaching students and policy makers and could replace the IS/LM model. While keeping the positive lessons from the model, it IS/MY model deals realistically with money. The central bank sets an interest rate, and loan demand adjusts, which can include situations in which loan demand does not react to a change in the interest rate(s) set by the central bank. Wicksellian economics – with a change in the interest rate automatically triggering a change in the monetary aggregate – can be included in the model as a special case.

You find the IPE Berlin working paper here. and the published version in the International Journal of Pluralism and Economics Education here (Int. J. of Pluralism and Economics Education, 2014 Vol.5, No.3, pp.279 – 297).

Here are my slides from the YSI Berlin Workshop on the Financial Crisis from November 2012.

Here are some thoughts on the liquidity trap in the IS/MY framework.

What would happen if the policy makers would turn the euro zone into a net exporter?

The carry trade and emerging market crises in the IS/MY framework.

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