James Tobin and the Transformation of the IS-LM Model

Abstract

1992, 1993), played a leading role in the transformation of IS/LM from a model with simple equations for the money market and the flow of investment into a modelling framework with a much more fully developed treatment of asset markets and investment, and mounted a spirited defence of this approach against New Classical critiques. After taking part as a student and post-doctoral fellow in Alvin Hansen’s reformulation of IS/LM, Tobin’s subsequent career centred on replacing the money market equilibrium equation and the investment function of the IS/LM model with what he termed a “General Equilibrium Approach to Monetary Theory ” (the title of Tobin’s 1969 contribution to the inaugural issue of the Journal of Money, Credit and Banking), replacing “the interest rate ” with a menu of asset returns and paying attention to stock-flow dynamics. This was a general equilibrium approach in the sense that equilibria in the

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