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Leijonhufvud on New Keynesian Economics and the economics of Keynes

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  • Hans-Michael Trautwein

Abstract

The theme that Axel Leijonhufvud has extracted from the economics of Keynes is the potential for failures in the intertemporal coordination of activities in complex market systems. In his path-breaking book of 1968, he attacked standard Keynesian Economics for its view on frictions, which reduces the causes of macroeconomic pathologies to nominal rigidities. With the rise of DSGE-based New Keynesian Economics, Leijonhufvud has pointed out that ‘standard macroeconomics’ is still stuck in the frictions view. Referring to recent financial crises, he considers DSGE modelling to be hopelessly inadequate for dealing with such macroeconomic instability. Yet, the financial frictions literature in New Keynesian Economics claims to have found ways to incorporate financial crises into DSGE frameworks. The article describes continuity and change in Leijonhufvud’s critique of Old and New Keynesians, and assesses contrary claims to progress made in the DSGE world.

Suggested Citation

  • Hans-Michael Trautwein, 2020. "Leijonhufvud on New Keynesian Economics and the economics of Keynes," Oxford Economic Papers, Oxford University Press, vol. 72(4), pages 923-945.
    • Handle: RePEc:oup:oxecpp:v:72:y:2020:i:4:p:923-945.
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    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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