Comparison of the IS-MP and IS-LM Models and Policy Implications: The Case of the U.S.

Abstract

According to regression analysis based on the U.S. data, the IS-MP model reveals that expansionary fiscal policy would stimulate the economy and a lower expected inflation rate would increase real output whereas the IS-LM model shows that expansionary fiscal policy is ineffective and that a lower expected inflation rate would not increase real output. Both models indicate that real depreciation or a higher stock price would increase real output. The IS-LM model exhibits a smaller forecast error and a higher explanatory power than the IS-MP model. These results may pose challenges for policymakers in model selections and making macroeconomic decisions.