The New Keynesian Synthesis - CORE
New Keynesian economics was developed in response to the New Classical school and attempts to provide micro foundations for Keynesian economics. New Keynesians assume that agents have rational expectations but also that there exits many market failures, such as imperfect competition, which cause price and wage rigidities. In New Keynesian models, these rigidities, or stickiness, lead to failures in the market adjustment mechanism and prevent the economy from reaching full employment. This school of thought recommends the government use fiscal and monetary policy to stabilise the economy.
What is New Keynesian economics
Two main assumptions define the New Keynesian approach tomacroeconomics. Like the New Classical approach, New Keynesianmacroeconomic analysis usually assumes that households and firmshave . But thetwo schools differ in that New Keynesian analysis usually assumes avariety of . In particular, New Keynesians assume prices and wagesare "", which means they do notadjust instantaneously to changes in economic conditions.
More recently, macroeconomists have begun to build (DSGE) models with Keynesian features. TheNew Keynesian DSGE modeling methodology is explained in 'stextbook Interest and Prices: Foundations of a Theory ofMonetary Policy.Economists are now actively estimating quantitative models of thistype, andusing them to analyze optimal monetary and fiscal policy.
New Keynesian economics - Wikipedia, the free …
Studies of optimal monetary policy in New Keynesian DSGE modelshave focused on interest rate rules (especially ''),specifying how the central bank should adjust the in response to changes in and output. (More precisely,optimal rules usually react to changes in the , rather than changes in outputper se.) In some simple New Keynesian DSGE models, itturns out that stabilizing inflation suffices, because maintainingperfectly stable inflation also stabilizes output and employment tothe maximum degree desirable. Blanchard and Galí have called thisproperty the 'divine coincidence'.However, they also show that in models with more than one marketimperfection (for example, frictions in adjusting the employmentlevel, as well as sticky prices), there is no longer a 'divinecoincidence', and instead there is a tradeoff between stabilizinginflation and stabilizing employment.
New Keynesian economics | Lies, Liars, Beatniks & …
Besides sticky prices, another market imperfection built intomost New Keynesian models is the assumption that firms are . Infact, without some monopoly power it would make no sense to assumesticky prices, because under , any firm witha price slightly higher than the others would be unable to sellanything, and any firm with a price slightly lower than the otherswould be obliged to sell much more than they can profitablyproduce. Therefore, New Keynesian models assume instead that firmsuse their to maintain their prices above , so that even if they failto set prices optimally they will remain profitable. Manymacroeconomic studies have estimated typical firms' degree ofmarket power, so this information can be used in parameterizing NewKeynesian models.
DO THE NEW KEYNESIAN MICROFOUNDATIONS ..
New Keynesianism, associated with , , , , , , and , is aresponse to and the school. That schoolcriticized the inconsistencies of Keynesianism in the light of theconcept of "." The newclassicals combined a unique equilibrium (at ) with rational expectations. The New Keynesians use"microfoundations" to demonstrate that price stickiness hindersmarkets from clearing. Thus, the rational expectations-basedequilibrium need not be unique.
New-Keynesian Economics Today: The Empire Strikes …
Significant early contributions to New Keynesian theory werecompiled in 1991 by editors and in NewKeynesian Economics, volumes 1 and 2. Thepapers in these volumes focused mostly on , that is,microeconomic ingredients that could produce Keynesianmacroeconomic effects, and did not yet attempt to constructcomplete .