Whither IS-LM

Abstract Keynes considered expectations a central factor in macroeconomic dynamics. Much of his discussion of them treats them as volatile but exogenous (‘animal spirits’), but in places he elaborates on the importance of particular types of endogenous expectations. Since the equations he wrote down did not include an explicit role for expectations, the IS-LM codification of Keynesian orthodoxy could plausibly ignore them, and did so. This not only distorted Keynes’s thinking, it ironically weakened Keynesian orthodoxy in the face of the rational expectations critique. The standard Keynesian position came to be that expectations, or at least endogenous expectations, were not as important as the RE critics made them out to be. This was a substantively weak position in itself, and it had the further weakening effect of keeping Keynesian attention away from developing a strong response to Keynes’s new classical critics.