modern macroeconomics (original) (raw)

The missing link in Keynesian macroeconomics

In the real world, prices do not behave symmetrically. Usually, nominal wages and prices are sticky downward but a lot more flexible upward; the latter is illustrated by inflationary and hyperinflationary processes. However, most mainstream economics is built upon the assumption that nominal prices are equally flexible in both directions. This leads to quite unrealistic and erroneous predictions as far as downturn in economic activity is concerned. Given price asymmetry, it is necessary to do separate analyses: on one hand, full-employment macroeconomics (price equilibrium macroeconomics) and, on the other, the macroeconomics of recession and depression (Keynesian macroeconomics). Prices play a role in the first case, but not in the second one. The present paper aims at pointing out the need for reconstructing macroeconomics from a realistic point of view. It argues that price downward stickiness must be a fundamental assumption in any economic model which tries to explain and predict real-world market behavior as well as recommend economic policies. It also claims that Keynesian macroeconomics has to be the point of departure of a realistic reconstruction of macroeconomic theory. Finally, it maintains that price downward rigidity fits perfectly well the Keynesian model, while this does not happen with either the New Keynesian or the Post-Keynesian models.

Macroeconomic Perspectives on Inflation and Unemployment

Working Papers, Department of Economics, 1990

The present paper is the first in a series of three essays in which we examine the macroeconomic and structural approaches to inflation. In this paper we explore some of the key contributions to the macroeconomic literature which appeared since the late 1950s. Much of this literature evolved in a dual love hate relationship with the Phillips Curve. Scholars who endorsed the Phillips Curve on the basis of historical evidence were surprised when it started to crumble as soon as they assimilated it into their macroeconomic models. The gradual emergence of stagflation and the progressive breakdown of the Phillips Curve presented mainstream macroeconomics with the most serious challenge since the Second World War. Macroeconomists attacked the Phillips Curve but their criticisms sought to modify, not nullify. The idea that inflation and unemployment were inversely related was apparently too significant to discard so the notional relationship was simply ‘augmented’ by auxiliary factors. The cost of saving the Phillips Curve was substantial. To explain stagflation, macroeconomists resorted to 'disequilibria,' ‘rigidities’ and ‘exogenous shocks’ and they abandoned, at least temporarily, the ideal formulation of the neoclassical synthesis.

The Macroeconomics of Low Inflation

Brookings Papers on Economic Activity, 1996

THE CONCEPT of a natural unemployment rate has been central to most modern models of inflation and stabilization. According to these models, inflation will accelerate or decelerate depending on whether unemployment is below or above the natural rate, while any existing rate of inflation will continue if unemployment is at the natural rate. The natural rate is thus the minimum, and only, sustainable rate of unemployment, but the inflation rate is left as a choice variable for policymakers. Since complete price stability has attractive features, many economists and policymakers who accept the natural rate hypothesis believe that central banks should target zero inflation. We question the standard version of the natural rate model and each of these implications. Central to our analysis is the effect of downward nominal wage rigidity in an economy in which individual firms experience stochastic shocks in the demand for their output. We embed these features in a model that otherwise resembles a standard natural rate model and show there is no unique natural unemployment rate. Rather, the rate of unemployment that is consistent with steady inflation We would especially like to thank Neil Siegel, Justin Smith, and Jennifer Eichberger for invaluable research assistance. We are also grateful to Pierre Fortin, Harry Holzer, and Christina Romer for providing us with data, and to

The New Keynesian Theory and Its Associated Model

Network Intelligence Studies, 2016

The basic new Keynesian model rendered in this paper, as well as the analysis of the reaction of economic variables to the occurrence of a structural, monetary policy shock, strengthen the hypothesis exposed at pure theoretical level, namely the active role of Central Banks in economy, the classical dichotomy between the nominal and the real economic factors being abandoned. As reflected by the impulse-response function graphs, the model endogenous variables: output, output gap, labour hours, inflation rate, nominal interest rate and real interest rate, clearly react to the exogenous variables of the same, represented by structural shocks, returning afterwards, more or less quickly, to their initial steady state. In compliance with the literature in the matter, the monetary entity policies, although having a lower impact than the one generated by the technological changes, manifest obvious influences on the model variables, therefore affecting both the decisions of the representativ...