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| New Classical | |
|---|---|
| Name | New Classical |
| Field | Economics |
| Founded | 1970s |
| Key people | Robert Lucas, Thomas Sargent, Neil Wallace, Edward Prescott, Finn Kydland |
| Notable works | "Expectations and the Neutrality of Money", "Rules Rather than Discretion", "Rational Expectations and Inflation" |
| Influences | Classical economics, Monetarism, Walrasian general equilibrium |
New Classical
The New Classical school of macroeconomics emphasizes microfoundations, rational expectations, and market-clearing models developed in the 1970s and 1980s. It is associated with research programs and institutions linked to University of Chicago, University of Minnesota, Stanford University, Princeton University, Carnegie Mellon University, and Massachusetts Institute of Technology. Leading figures received recognition from Nobel Prize in Economic Sciences, and debates engaged policymakers at the Federal Reserve, International Monetary Fund, World Bank, and national treasuries.
Origins trace to critiques of Keynesianism after the Stagflation episodes of the 1970s and to earlier work by proponents of Classical economics and Monetarism. Foundational papers emerged from scholars at University of Chicago, University of Rochester, Northwestern University, and University of Minnesota, often published in journals like the American Economic Review and the Journal of Political Economy. Influential antecedents include models from Léon Walras and Alfred Marshall traditions and analytical tools from Paul Samuelson, John Hicks, and Milton Friedman. The movement formalized through conferences at Cowles Foundation, NBER, and CEPR.
Core assumptions include rational expectations as formulated by John Muth, representative agents akin to work by Frank Ramsey and Robert Solow, and market clearing as in Walrasian auctioneer frameworks. Canonical models feature the Lucas critique which challenges parameter stability in policy evaluation, the Lucas supply curve, and real business cycle models developed by Finn Kydland and Edward Prescott. Other models utilize optimizing behavior from microeconomic roots found in Arrow-Debreu general equilibrium and incorporate stochastic shocks similar to methods used by Thomas Sargent and Christopher Sims.
Policy conclusions stress rules over discretion as argued in "Rules Rather than Discretion" and favor credible commitment mechanisms adopted by central banks such as the Federal Reserve or independent institutions like the Bank of England. Debates engaged proponents of activist fiscal policy in contexts involving Keynesian economics, Phillips curve interpretations, and policy design influenced by the Barro-Ricardo equivalence thought experiment. Discussions involved institutions including Congressional Budget Office, European Central Bank, and international forums like the G7.
Critiques arose from advocates of New Keynesian frameworks, structuralists associated with Post-Keynesian economics, and empirical macroeconomists influenced by Behavioral economics pioneers such as Daniel Kahneman and Amos Tversky. Alternative models include sticky-price approaches by N. Gregory Mankiw and David Romer, overlapping generations models linked to Paul Samuelson and Peter Diamond, and heterogeneous-agent approaches advanced by Daron Acemoglu and Angus Deaton. Methodological criticism referenced works by Joan Robinson, Hyman Minsky, and James Tobin.
Prominent contributors include Robert Lucas (Lucas critique, expectations), Thomas Sargent (rational expectations, structural estimation), Edward Prescott and Finn Kydland (real business cycles, time consistency), Neil Wallace (policy ineffectiveness), Robert Barro (Ricardian equivalence), and John Taylor (policy rules). Other associated scholars and collaborators appear from affiliations with University of Chicago, Carnegie Mellon University, Princeton University, Yale University, Harvard University, Columbia University, London School of Economics, University of California, Berkeley, and Northwestern University.
Empirical tests employ vector autoregression techniques developed by Christopher Sims, structural estimation strategies influenced by Gul, Pesaran, and Smith methodologies, calibration practices used by Finn Kydland and Edward Prescott, and likelihood-based inference found in work by James Heckman and Denis Sargan. Data sources include time series from FRED (Federal Reserve Economic Data), national accounts compiled by OECD, Bureau of Economic Analysis, and central bank datasets. Empirical debates invoked applied econometricians at NBER, CEPR, and research programs at IMF and World Bank.
Historically, the school grew through the 1970s and 1980s, shaping discourse amid policy shifts during administrations of Margaret Thatcher, Ronald Reagan, and central bank reforms in the 1990s financial liberalization era. Its legacy appears in modern macro curricula at MIT, Princeton, Chicago, Stanford, and in textbooks by authors like Olivia Mitchell and Olivier Blanchard (as educators), as well as influence on contemporary debates involving quantitative easing, inflation targeting, and the design of independent central banks. The program prompted sustained dialogue with New Keynesian and heterodox schools, informing ongoing research at institutions such as IZA Institute of Labor Economics, Centre for Economic Policy Research, and university departments worldwide.
Category:Macroeconomic schools of thought