New Keynesian economics

New Keynesian economics
Name	New Keynesian economics

New Keynesian economics is a school of macroeconomic thought that emerged in the late 20th century, synthesizing microeconomic optimization with Keynesian welfare concerns. It developed as a response to New Classical economics and as part of the broader Keynesian economics revival, integrating ideas from John Maynard Keynes-inspired scholars, rational expectations proponents, and rigorous market-frictions modeling. Major contributors include figures associated with institutions such as the Massachusetts Institute of Technology, London School of Economics, and University of Chicago.

Overview and historical development

New Keynesian economics traces roots through debates involving John Hicks, Alvin Hansen, and later critiques by Robert Lucas and Thomas Sargent during the Lucas critique era, leading to formalizations at institutions like Princeton University, Harvard University, Yale University, Stanford University, Columbia University, University of California, Berkeley, University of Pennsylvania, University of Michigan, University of Rochester, Bank of England, Federal Reserve Board, European Central Bank, and International Monetary Fund. Early formal papers by scholars connected to Nobel Memorial Prize in Economic Sciences recipients and nominees influenced the approach, as did methodological exchanges with proponents of Monetarism and critics such as Milton Friedman and Friedrich Hayek. Debates in journals like American Economic Review, Quarterly Journal of Economics, Journal of Political Economy, Econometrica, and Review of Economic Studies shaped the literature alongside conferences at NBER, CEPR, CEMFI, and Cowles Foundation.

Microfoundations and price/wage rigidities

New Keynesian models build microfoundations drawing on optimization problems used by households and firms as seen in work from Edmund Phelps, Gregory Mankiw, David Romer, N. Gregory Mankiw, Joseph Stiglitz, Olivier Blanchard, Ben Bernanke, Jeanne Savin, Michael Woodford, John Taylor, Robert Hall, George Akerlof, Janet Yellen, Christopher Sims, Robert Barro, Thomas Sargent and others. Sticky-price mechanisms reference menu-cost literature related to A. P. Usher-style problems and connections to search-theory models advanced by Peter Diamond, Dale Mortensen, and Christopher Pissarides. Wage rigidity discussions invoke bargaining frameworks reminiscent of Oliver Hart and John Moore-style contracting, and the role of contracts analyzed in contexts like Calvo, Taylor Rule-derived thinking, and nominal rigidities addressed in work by Jordi Gali and Mark Gertler. Heterogeneous firm models connect to research at National Bureau of Economic Research and policy discourse at central banks such as the Federal Reserve Bank of New York and European Central Bank.

Theoretical models and key equations

Canonical New Keynesian models incorporate representative-agent intertemporal Euler equations similar to those employed by Franco Modigliani-inspired life-cycle frameworks and habit-formation specifications used by authors linked to Carnegie Mellon University and University College London. The core system typically includes an IS-like relation derived from Euler equations, a New Keynesian Phillips Curve derived from firm-level price-setting à la Calvo pricing and Rotemberg pricing, and a monetary policy rule inspired by the Taylor Rule associated with John B. Taylor. Solution methods borrow from linear rational expectations techniques popularized by Olivier Blanchard, Michael Woodford, Thomas Sargent, Robert Lucas, Christopher Sims, and numerical methods advanced at RAND Corporation and CEPR. Extensions incorporate financial frictions modeled after Kiyotaki–Moore dynamics, credit intermediation influenced by Ben Bernanke-style frameworks, and heterogeneous-agent refinements echoing work at Massachusetts Institute of Technology and Princeton University.

Monetary policy implications and the New Keynesian Phillips Curve

Policy implications draw on prescriptions related to interest-rate rules at institutions such as the Federal Reserve, Bank of England, European Central Bank, and Bank for International Settlements. The New Keynesian Phillips Curve, associated with scholars linked to NBER and CEPR research programs, links inflation dynamics to marginal costs and expected future inflation in lines of research citing John Taylor and Michael Woodford. Central bankers like Alan Greenspan, Ben Bernanke, Janet Yellen, Mario Draghi, and Christine Lagarde engaged with these ideas in policy debates, alongside academic work by Christopher Sims, Jordi Gali, Mark Gertler, and Olivier Blanchard. Forward-looking policy analyzed under rational expectations parallels studies from Stanford University and Harvard University and interacts with financial stability concerns raised by Raghuram Rajan and Adair Turner.

Criticisms and alternative perspectives

Critiques come from advocates of New Classical economics, post-Keynesian scholars inspired by Joan Robinson and Piero Sraffa, and heterodox economists connected to Cambridge, UK and Cambridge, Massachusetts traditions. Prominent critics include researchers influenced by Hyman Minsky, Joseph Stiglitz, Ha-Joon Chang, and Steve Keen who emphasize financial instability, distributional dynamics, and macroeconomic complexity. Methodological challenges draw on debates with proponents of Agent-based computational economics at Santander Workgroup-style conferences and interactions with structural vector autoregression techniques from Christopher Sims and Thomas Sargent. Alternative frameworks include Monetarism-inspired rules, Post-Keynesian economics models, Austrian School perspectives linked to Ludwig von Mises and Friedrich Hayek, and behavioral approaches referencing Daniel Kahneman and Amos Tversky.

Empirical evidence and applications

Empirical testing occurs in studies using datasets curated by institutions like the Bureau of Labor Statistics, OECD, IMF, and World Bank, and in cross-country assessments across United States, United Kingdom, Japan, Germany, France, Italy, Spain, Canada, Australia, and emerging markets. Empirical techniques draw on time-series tools from Econometrica-published work and identification strategies developed at NBER and CEPR. Applications range from inflation targeting debates informed by episodes such as the Great Moderation and the Global Financial Crisis, to policy design in moderation of business cycles during crises studied by researchers at Federal Reserve Bank of San Francisco, Bank of Canada, Reserve Bank of Australia, and Bank of Japan. Ongoing work connects to macroprudential policy research at the Bank for International Settlements and to forecasting efforts used by central banks and institutions like the International Monetary Fund.

Category:Macroeconomics