Interest Rate Determinated And Economic Growth: Dynamic IS-LM Model And Empiricial Analysis

In the development of West's interest rate determination theory, there has emerged early interest rate determination theory, the real interest rate determination theory, Keynesian liquidity preference theory, loanable funds theory and IS-LM model of the Neo-Classical Synthesis Theory and so on. As considering equilibrium of both the commodity markets and the money market, IS-LM model was once seen as the most perfect interest rate determination theory. And after a long time of the appearance of the IS-LM Model, it reflects the economic development well, so IS-LM model have attracted lots of the Western economists praise. But IS-LM model still exist some shortcomings, such as the lack of micro-basis and only static analysis. Although many contemporary scholars begin to seek micro-basis for IS-LM model and make it to be a dynamic model through the introduction of dynamic optimization analysis, but interest rate determination theory is far from perfection and also need further improvement in the theory and analytical framework.The aim of this paper is to continue to make the IS-LM model more perfect, and we analyze the people behaviors in the intertemporal optimal choice framework to seek micro-basis for IS-LM model .And by adding the investors theory, consumers theory, monetary supply and demand theory and bank monetary expansion theory well into the dynamic process of the theoretical analysis, we analyze mutual dynamic equilibrium of both the commodity markets and money market, and get the dynamic IS-LM model finally. Then we do some appropriate modification and improvements for the dynamic of the IS-LM model established according to China's actual conditions, and this make IS-LM model include both the adaptive and rational expectations, and possess the advantages of both the adaptive and rational expectations, so the IS-LM model can be able to not only overcome most of the deficiencies of traditional IS-LM model largely, but also avoid"Lucas Critique". Thereby the improved IS-LM model can be used to simulate dynamic evolution of the interest rate and economic growth well under the condition of established economic policies when economic system gets equilibrium.Finally, we give empirical testing and analyze on the dynamic IS-LM model established in the use of the 1980-2006 annual data, and show the relation between the main economic variables.