Not because he says anything daft, but precisely because what he says seems so sensible a set of minor modifications. But it's a set of minor modifications that takes us in precisely the wrong direction globally, even if it does lead towards a local maximum. I understand and sympathise with where he's going; I really do.
And because I probably won't teach intermediate macro again (I'm burned out). And even if I did teach it again, I would feel myself inexorably drawn to teaching it using the same sort of approach that he advocates. Because intermediate macro is just one small step that is part of a staircase, and you aren't doing the students any favours if you shift one of those steps so it doesn't line up with all the other steps. (Economics tends to be like that.)
I launched a mini-Tweetstorm in response, which I copy (with minor edits) here:
- Trying to hide money in the ISLM model is exactly the wrong way to adjust your teaching in response to a monetary crisis.
- The ISLM model is *not* a model of a barter economy. The AD curve (function) is a *monetary* demand for goods. Monetary exchange is central.
- Though adding a (second) wedge between IS & LM curves makes sense. See my (very old) post: "IS, LM, and two wedges: understanding the second wedge"
- And the slope of LM curve depends on the interest-elasticity of BOTH the demand AND the supply of money, and it's flat if latter is infinite.
- Students must be taught that AD & AS curves are NOT the summation of micro Demand & Supply curves. We must confront this fallacy head-on, not hide it.
- And we must teach that AD curve will slope the "wrong" way (so there will be no "automatic" tendency to LR equilibrium) *unless* monetary policy is sensible.
- And we should not succumb to Inflation Targeting's "fetish of the first derivative" and treat the inflation rate (as opposed to the price level) as fundamental.
- Because the relevance of what we teach should outlive the Here & Now of particular peculiar policy regimes like Inflation-Targeting.
- [And I ReTweeted Matthew Martin's:] "disagree. failure of N[ew] K[eynesian] models to make this [LM relation between Liquidity Preference and Money Supply] explicit is their biggest weakness, leading to neo-fisherism etc."
But simply saying "No!" to Olivier Blanchard's proposed changes doesn't resolve the underlying problem.
The ISLM model is a theory of Aggregate Demand, which when coupled with an assumption of price (or wage) stickiness (like a Short Run Phillips Curve) provides a theory of recessions as due to deficiences in Aggregate Demand. I am broadly in agreement with that approach to understanding recessions. So what's wrong with teaching ISLM?