On the missing equation: Comment |
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Authors: | Douglas R Shaller |
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Institution: | Rutgers University, USA |
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Abstract: | Canto and Miles (CM) present and analyze graphically “a third, alternative method for closing the IS-LM system of equations”—the ‘wedge model’. According to CM, “the result is a more general set of results” and “the two traditional alternatives are only special cases.” The CM model, however, is logically inconsistent. Because CM implicitly assume simultaneous capital market equilibrium and disequilibrium, CM's assumptions are mutually inconsistent. Thus, none of the reported results logically follow. Furthermore, the CM model is not very general. This paper proves analytically that GNP is determined without the IS and LM equations both in the CM model and in the obvious logical patchups of the CM model. Therefore, for example, in the CM model exogenous changes in business-fixed investment or consumption have no predicted effect on national income. |
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