The Development of the IS-LM-EE model and its Implications for Economic Policy

Abstract

The macroeconomic activity must consider the effects of the ecological environment as ecological sustainability increasingly constrains humans’ economic behaviour. Therefore, how to use fiscal and monetary policy tools to achieve harmonious economic and environmental development has become a hot topic of research among scholars. As a result, this study begins by distinguishing between the IS-LM-EE family of models and the various impacts of the same combination of monetary and fiscal policies on economic growth. It is discovered that the link between environment and capital is not clearly described in the models, which results in a variety of policy consequences. For example, tight fiscal and expansionary monetary policy would boost the economy in the Heyes and Sim IS-LM-EE models, whereas the Decker and Wohar model would experience an economic downturn as a result of the same policy combination. Meanwhile, the models of Heyes, Lawn, Decker and Warhar lack further automatic adjustment methods, and although the Sim model features an adjustment mechanism, its lag can significantly affect its effectiveness. Secondly, the study employs Heyes' model as a theoretical basis to simulate the economic impact of government policies including carbon emission quotas and concludes by summarising the limitations of the existing models.