IS-LM Model: Mathematical simulation and application in Mexico

Abstract

This paper presents the procedure and result of the mathematical simulation of fiscal and monetary policies with the use of the IS-LM model -with a classical and Keynesian approach- with the aim of demonstrating that the current macroeconomic policies in Mexico are based on the principle of budgetary austerity and monetary astringency, which has favored low economic growth, a poor generation of formal employment and price stability. The simulations were made in Excel for Windows through the application of a module integrated to the software, known as Solver, which allows us to find solutions to a system of equations. The most important result is that expansive policies in the Keynesian world favor production and employment. This was contrasted with data from the Mexican economy, which allows the proposal of a change in priorities in the objectives and use of economic instruments by the authorities in order to overcome the current stage of slow growth and low prices and to move towards a model of sustainable productive dynamism.