Modification of IS-LM-BP model within the concept of neoclassic synthesis

Abstract

With the intensification of processes caused by globalization, the relevance of the studies about the impact of exogenous shocks in the global markets for wealth and money on the macroeconomic parameters of a small open economy is growing. Moreover, the basis of modern economic relations within the global economy is not only the global trade in goods and services, but the international movement of production factors. Migration of labor resources starts playing an increasingly important role in the sphere of the international movement of production factors. The study of these processes and their further analysis is possible within the framework of the IS-LM-BP model supplemented by the labor market data. The IS-LM-BP model is still a significant theoretical and methodological development, which allows us to analyze the impact of exogenous shocks on the global and domestic markets of goods and money markets on a small open economy, as well as evaluate the effectiveness of state regulation. The opportunity to assess the impact of the exchange rate regime and the mobility of international capital on the effectiveness of state regulation in a small open economy, as well as on the mechanism for adjusting disturbed double equilibrium under the influence of exogenous shocks is considered to be the most interesting. However, the most important macroeconomic market – the labor market – remains outside the framework of this model. The purpose of the study is to modify the IS-LM-BP model developed in the framework of the concept of J.M. Keynes including a new curve – the full-employment curve in the model. The derivation of the curve is based on the theoretical premises of the neoclassical concept: full employment directly depends on the real interest rate in this model acts as an endogenous parameter. This study is based on Keynesian principles of double equilibrium in a small open economy supplemented by neoclassical ideas about full employment as an endogenous parameter. The modification of the IS-LM-BP model based on the principles of neoclassical synthesis means the development of a full-employment curve and including it in the case study model based on the basic principles of the theoretical justification of this macroeconomic model. The full-employment curve identifies the equilibrium curve in the neoclassical labor market. The reason for its inclusion in the IS-LM-BP model is the existing theoretically substantiated relationship between the real interest rate and the supply on the labor market as part of the concept of a new classical school. The dependence is based on the inter-temporal price of labor, which, in turn, is directly dependent on the real interest rate. Since the derivation of the full-employment curve is based on the neoclassical postulates of the functioning of the labor market, the suggested modification of the IS-LM-BP model can be considered as an example of neoclassical synthesis. The IS-LM-BP model modified by the author is proposed as a methodological base for the study of such theoretical and practical aspects of the functioning of open business systems as: 1) the analysis of the adjustment mechanism in the process of restoring disequilibrium in the labor market, goods, money and foreign exchange as a result of exposure to exogenous shocks; 2) the analysis of the effectiveness of state regulation in the functioning of the labor market, goods, money and foreign currency; 3) the comparison of the desired theoretical model with the real processes inherent in small open economies.

Keywords

IS-LM model, Mandell-Fleming model, IS-LM-BP model, real business cycle model, full-time curve, Keynesian concept, neoclassical synthesis, IS-LM-BP-NF model, exchange rate regime, capital mobility, small open economy

For citation

Kamyshova A.B. Modification of IS-LM-BP model within the concept of neoclassic synthesis. Perm University Herald. Economy, 2019, vol. 14, no. 4, pp. 537–550. DOI 10.17072/1994-9960-2019-4-537-550

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