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Keynesian, New Keynesian, and New Classical Economics

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  • Bruce C. Greenwald
  • Joseph E. Stiglitz

Abstract

Much of the new theory of macro-economics that has been built upon micro-economic models of imperfect information leads to conclusions which are surprisingly close in spirit to Keynes' original analysis. This paper summarizes the macro-economic implications of information-based models of efficiency wages, credit-rationing and the breakdown of financial markets for equity-type securities. It shows how these models lead to behavior by firms and interactions among economic agents that account for many of the phenomena identified by Keynes in qualitative terms which were largely lost in subsequent formalizations of the Keynesian model. These imperfect information macro-models provide consistent theoretical explanations in the Keynesian spirit in unemployment, investment concentrated business cycles, rigid prices and the effectiveness of monetary and fiscal policy interventions. In doing so, they reconcile macro and micro-economic analysis in a way that has so far been achieved neither by the traditional Keynesians, who assumed away the micro-dimension of the problem, nor by the new classical economists who assumed away the macro-dimension of the problem.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2160.

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Date of creation: Feb 1987
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Publication status: published as Greenwald, Bruce and Joseph E. Stiglitz. "Keynesian, New Keynesian and New Classical Economics," Oxford Economic Papers, Vol. 39, 1987, pp. 119-132.
Handle: RePEc:nbr:nberwo:2160

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  1. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, American Economic Association, vol. 61(1), pages 82-93, March.
  2. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
  3. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, American Economic Association, vol. 73(2), pages 297-302, May.
  4. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(5), pages 823-38, Supp..
  5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(2), pages 187-221, June.
  6. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(2), pages 229-64, May.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 912-27, December.
  8. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March.
  9. Stiglitz, Joseph E, 1985. "Credit Markets and the Control of Capital," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 17(2), pages 133-52, May.
  10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  11. Joseph E. Stiglitz, 1983. "On the Relevance or Irrelevance of Public Financial Policy: Indexation,Price Rigidities and Optimal Monetary Policy," NBER Working Papers 1106, National Bureau of Economic Research, Inc.
  12. Bruce Greenwald & Joseph E. Stiglitz, 1987. "Money, Imperfect Information and Economic Fluctuations," NBER Working Papers 2188, National Bureau of Economic Research, Inc.
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