J Int Comp & Health Inf. Vol. X, No.

Y, XXXX
ISSN: 2715-6923, e-ISSN: 2721-9186

Dynamic Analysis of IS-LM Business

Cycle Model with Control

Arista Fitri Diana

Department of Aktuarial Science, Institut Teknologi Statistika dan Bisnis
Muhammadiyah Semarang, Jl. Prof Dr.Hamka KM 1, Ngaliyan Semarang,
50181, Indonesia
Corresponding author: arista.fitri@itesa.ac.id

Shafira Meiria Rahmasari

Department of Mathematics Education, Sekolah Tinggi Agama Islam Al-Bahjah
Cirebon, Jl. Pangeran Cakrabuana Blok Gudang Air, Sendang, Sumber, Kab.
Cirebon, 45611, Indonesia

Article histroy :
Received: TT MMM YYYY
Accepted: TT MMM YYYY
Avalaible online: TT MMM YYYY
Dhimas Mahardika
Department of Science and Technology, Universitas Nasional Karangturi, Jl.
Raden Patah No 182-192 Rejomulyo, Semarang Timur, Kota Semarang, 50127,
Indonesia
Abstract: This The IS-LM business cycle model is a financial economics model
that uses theory in economic and financial mathematics by applying a deterministic
model that forms a dynamic system. The variables in the IS-LM model are income,
capital stock, and interest rest. This article will discuss the non-linear function of
the investment function, saving function, and money demand function by
providing import control and the level of public consumption to increase income.
Furthermore, local stability analysis was carried out with the Routh Hurwitz
method. Meanwhile, to analyze the optimal control on the model using the
Maximum Pontryagin Principle. The numerical results obtained state that the
optimal control strategy given can increase revenue.

Keywords: IS-LM BUSINESS CYCLE MODEL, DYNAMIC MODEL, EQUILIBRIUM

POINT, LOCAL STABILITY ANALYSIS, OPTIMAL CONTROL
Journal of Intelligent Computing and Heallth Informatics (JICHI) is licensed under a Creative Commons Attribution-Share Alike 4.0 International License

1. Introduction in macroeconomics which consists of the variables of

In the development of science, especially in applied
mathematics, there is a lot of use of mathematical
modeling theory to model a phenomenon that occurs in
real life. One use of mathematical models is widely used
in the field of financial economics. A deterministic model
is a mathematical model to describe interaction patterns
between variables. In the deterministic model, stability
analysis can be obtained. In the economic field, economic
growth can be modeled using deterministic models that
form a dynamic system, one of which is the IS-LM
(Investment Saving-Liquidity Money) business cycle
model. This model was introduced by Kalecki (Kalecki M,
1935) and Kaldor (Kaldor N, 1940), then continued by
Torre (Torre V, 1977), Gabrisch and Lorenz (Gabrisch G
et al, 1987), Cai (Cai J, 2005), and Zhou and Li (Zhou L
et al, 2009). The IS-LM business cycle model is a model
income, capital stock, and interest rates, and involves the
investment function, the saving function and the demand
for money function. Based on Zhou and Li (Zhou L et al,
2009). these three functions are nonlinear functions. With
modifications made by Ni Ketut (Tastrawati Tari. N. K,
2012). the dynamic model for the variables of income,
capital stock, and interest rates becomes non-linear.
In this study, modifications to the IS-LM business cycle
model will be carried out by adding control, so that it can
show optimal conditions for maximizing revenue. The
controls given to the model are the import rate and
consumption rate. By reducing the rate of import and
consumption rate is expected to increase the amount of
income. Control is given to the interest rate variable and
capital stock variale.
The dynamic model of the business cycle has been
developed by several researchers, there are (Usadha R et
2 Ilham et al.

al, 2007), (Tastrawati Tari. N. K, 2012), (Hidayati N. A et

al, 2019). Modeling by (Usadha R et al, 2007), models the
IS-LM business cycle model with a linear investment
function, savings function and money demand function.
Then the model was further developed by (Tastrawati Tari.
N. K, 2012) who included the IS-LM business cycle Table 1. Description of Parameters
model with a savings function, and investment function, Notation Interpretations
and a nonlinear demand for money function, so that the 𝜶>𝟎
acceleration due to excess or
dynamic model of the IS-LM business cycle consists of underinvestment.
acceleration caused by a shortage or
nonlinear function which describes turnover. Money 𝜷𝟏 > 𝟎
excess demand for money.
follows a model that changes all the time. In developing the rate of decline in investment to the
−𝟏 < 𝜷𝟐 < 𝟎
the IS-LM business cycle model, many researchers added capital stock.
external factors that influence the dynamic of the model, 𝟎 < 𝒔𝟏 < 𝟏 growth rate of savings to income.
quantity demanded of money to
one of which was researcher (Hidayati N. A et al, 2019) 𝒈>𝟎
income.
who added controls to the IS-LM business cycle model. coefficient of adjustment in the goods
𝒂>𝟎
The addition of control to the research (Hidayati N. A et market.
al, 2019) can reduce the delay time so that the model coefficient of adjustment in the money
𝒃>𝟎
rotation cycle can reach stability more quickly. From the market.
𝑨>𝟎 technolocy productivity.
three researchers above, we develop a dynamic model of 𝑴>𝟎 constant money supply.
the IS-LM business cycle with control. The difference the amount of money demanded
𝒉>𝟎
between this model and the model in previous studies is relative to the interest rate.
the type of control given to the model. This model uses 𝒓>𝟎 lowest fixed rate of interest rate.
𝜹>𝟎 capital depreciation constant.
two controls, namely the rate of imports and the rate of
consumption, which are included in the interest rate and
capital stock variables respectively. 2.1 Equilibrium Point of The Dynamic Model
This research explains the dynamic model of the IS-LM
business cycle by adding controls. Then an analysis of the The equilibrium point is a condition where there are no
existence and stability at the equilibrium point in the changes in each variable over time [14]. System (2.2) can
dynamic model is carried out. Stability analysis aims to be written :
determine the interaction patterns between variables in the
dynamic model, so that the stability of the rotation of the
IS-LM business cycle model can be seen. Next, using the
Routh Hurwitz, local stability will be evaluated. The
optimal control is obtained by Pontryagin’s Maximum
Principle (Aldila, D et al, 2020).
We obtained the equilibrium point :
2. Model Formulation
The dynamic model (Chasnov, J. R, 2016) in the IS-LM
business cycle describes the interaction between income
variables, capital stock, and interest rates (Hidayati N. A
et al, 2019) by involving the investment function saving
function, and demand for money function. The non-linear 2.2 Existence of Equilibrium Point
IS-LM business cycle model is a modification carried out
by (Tastrawati Tari. N. K, 2012). The modification is In this section we will establish the existence condition
carried out by substituting a non-linear form for the of the equilibrium states. The equilibrium points of the
investment, savings and demand for money function. The model (2.2) are as follow :
investment function (I), saving function (S), and liquidity
function (L), according to De Casare (De Cesare L et al,
2005) can be modeled as follows.

so by substituting the function (2.1) in to the dynamic

model of the IS-LM business cycle, a non-linear dynamic
model is obtained with the variables income (Y), interest
rates (R), and stock of capital (K) as follows
2.3 Local Stability Analysis
In this section we will analyze the local stability of
equlilibrium points. We use eigenvalue and Routh
Hurwitz method to analyze equilibrium points.
First step we do the liearization of system (2.2).
 Manuscript Template for the Journal of Intelligent Computing and Health Informatics: JICHI 3

Then with maple application we obtain :

with the initial condition, .

Functional objetive J formulates optimization problems
to identify effective strategies. The optimal control
strategy has the aim of controlling interset rest and capital
stock so as to maximize income. The objective functional
of (2.4) is defined as :

For fixed points , we obtained

eigenvalues :

Where tf is the final time and the coefficients of

balance the costs factor caused by the
scale and importance of the four parts of the objective
Because the stability of fixed function. To find the optimal control on use,
points isn’t isolated for fixed points

, we
The Hamiltonian function of (2.4) as :
subtitute the to (2.3) and we get the characteristic
polynomial as follows :

with,

Theorem 2.1 (Dewi, Hana Mutia, 2022) The optimal

control for and the solution on system
(2.4) that minimize on , when
there are adjoint variable that satisfied :

Based on the Routh-Hurwitz criteria for the third degree

characteristic equation, the equilibrium point locally
asymtotically stable if :

2.4 Analyze of Optimal Control

Model (2.2) was modified by reducing import rates and
consumption rates so as to increase income. Import rate Where are trenversality
control (u1) is given to the interest rest variable, while conditions and the optimal control
consumption rate control (u2) is given to the capital stock satisfied the optimalitas conditions.
variable. From the two controls provided the dynamic
system equation with control is obtained:
4 Ilham et al.

Proof. 3.1 Interest Rest with and without Control

We use the Pontryagin Maximum Principle to get the
optimal control solutions. Differentiate the Hamiltonian
equation (2.7) to and evaluated the optimal
control variabel as :

From this, we get the optimal control as :

There for optimal control variables of characterize Figure 3.1. Graph of Interest Rest when given control and
by: not given control
The simulation model in Figure 3.1 shows the effect
after providing import control (u1) on Interest Rest. It can
be seen that after giving a control, the Interest Rest graph
was lower than before giving a control so that the interest
rest could be reduced. From the graph above, it is shown
that the interest rest was reduced from 19,42 to 1,707.

3.2 Capital Stock with and without Control

3. Numerical Simulation
In this section, numerical results are presented for the
model with control and the model without control. Using
Maple software version “Maple 12” and data from
(Tastrawati Tari. N. K, 2012) we simulated the model (2.2)
and (2.4). The values of parameters are given in the Table
2.
Table 2. Parameter Values
Notation Value
𝜶 1
𝜷𝟏 1 Figure 3.2. Graph of Capital Stock when given control
𝜷𝟐 -0.1 and not given control
𝒔𝟏 0.08
𝒈 0.05 The simulation model in Figure 3.2 shows the effect after
𝒂 1.03 providing of public consumption (u2) on capital stock. It
𝒃 0.6
𝑨 0.1
can be seen that after giving a control, the capital stock
𝑴 0.1 graph was lower than before giving a control so that the
𝒉 0.01 capital stock could be reduced. From the graph above, it
𝒓 0.001 is shown that the capital stock decreased from -6,6 to -
𝜹 0.1
25,15.
From the values of the parameters contained in the table
2 we obtained numerical simulation results, namely the
model with control will use the Runge-Kutta Order-4
algorithm, where to solve the system state using the
forward Runge-Kutta algorithm, while the backward
Runge-Kutta is used to solve the system state. complete
the co-state system.
 Manuscript Template for the Journal of Intelligent Computing and Health Informatics: JICHI
3.3 Income with and without Control
Figure 3.3. Graph of Income when given control and not
given control
The simulation model in Figure 3.3 shows the effect after
giving a control on interest rest and capital stock. The
income has increased after interest rest and capital stock
have decreased. The increasing of income is up to 10%.
3.4 Control Efficiency Graph u1
Figure 3.4. Graph of Control Conditions u1
The value of the controller u1 in Figure (3.4) ranges from
0 ≤ u1 ≤ 1 . The percentage of import rate given to interest
rest from t = 0 to t = 2,2 is stable on point 1 after that
decreased gradually until t = 9 reached 0. Giving control
5
u1 which was not maximal at 100% still had an impact on
increasing the compartment of income and decreasing the
interest rest.
3.5 Control Efficiency Graph u2
Figure 3.5. Graph of Control Conditions u2
The value of the controller u2 in Figure (3.5) ranges from
0 ≤ u2 ≤ 1 . Giving public consumption rate to capital
stock was carried out maximally and maintained until t =
1,75 then decreased gradually until t = 9 reached 0. Giving
control u2 which was not maximal at 100% still has an
impact on increasing the compartment of income and
decreasing the compartments of capital stock.
4. Conclusion
Based on the result of this research, it can be obtained
the development of a dynamic model of IS-LM bussines
cycle by adding two controls. The model was developed
by combining the nonlinear model the investment function,
saving function, and money demand function by
providing import control and the level of public
consumption control to increase income. From the
development of the model in this research, we get two
equilibrium points. Then we analyze the local stability
these equilibrium points. Based on the data from [7], we
get that first equilibrium point isn’t isolated and the
second equilibrium point is locally asymptotically stable
if according to the Routh Hurwitz criteria.
Furthermore, for the control model,it is obtained
optimal control solution using Pontryagin’s maximum
principle which can provide an overview of interest rate
and capital stock by choosing the optimal import and the
level of public consumption controls strategy. From the
numerical solution results can be obtained comparison of
each compartment when given control and when whitout
control. The giving of optimal import control can reduce
the interest rest, then the giving of public consumption
control can reduce the capital stock. From that we can
increase the income. After being given control, the
variable of interest rest decreased by 91,21% and variable
of capital stock decreased by 73,75% compared to the
model that was not given control. So that the provision of
optimal control can simultaneously reduce the interest rest
and capital stock.
6 Ilham et al.

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