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New Classicals And Keynesians, Or The Good Guys And The Bad Guys

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  • BARRO, R.J.

Abstract

Old- style Keynesian models relied on sticky prices or wages to explain unemployment and to argue for demand-side macroeconomic policies. This approach relied increasingly on a Phillips-curve view of the world, and therefore lost considerable prestige with the events of the 1970s. The new classical macroeconomics began at about that time, and focused initially on the apparent real effects of monetary disturbances. Despite initial successes, this analysis ultimately was unsatisfactory as an explanation for an important role of money in business fluctuations. Nevertheless, the approach achieved important methodological advances, such as rational expectations and new methods of policy evaluation. Subsequent research by new classicals has deemphasized monetary shocks, and focused instead on real business cycle models and theories of endogenous economic growth. These areas appear promising at this time. Another development is the so-called new Keynesian economics, which includes long-term contracts, menu costs, efficiency wages and insider-outsider theories, and macroeconomic models with imperfect competition. Although some of these ideas may prove helpful as elements in real business cycle models, my main conclusion is that the new Keynesian economics has not been successful in rehabilitating the Keynesian approach.

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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 187.

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Length: 21 pages
Date of creation: 1989
Date of revision:
Handle: RePEc:roc:rocher:187

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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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Keywords: economic theory ; enterprises ; money ; business cycles;

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References

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  1. Akerlof, George A, 1984. "Gift Exchange and Efficiency-Wage Theory: Four Views," American Economic Review, American Economic Association, American Economic Association, vol. 74(2), pages 79-83, May.
  2. Bennett T. McCallum, 1988. "Real Business Cycle Models," NBER Working Papers 2480, National Bureau of Economic Research, Inc.
  3. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 500-521, June.
  4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
  6. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 363-80, June.
  7. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  8. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 257-76, June.
  9. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  10. Jean-Pierre DANTHINE & John B. DONALDSON, 1988. "Efficiency Wages and the Real Business Cycle," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 8803, Université de Lausanne, Faculté des HEC, DEEP.
  11. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
  12. Carmichael, Lorne, 1985. "Can Unemployment Be Involuntary? Comment [Equilibrium Unemployment as a Worker Discipline Device]," American Economic Review, American Economic Association, American Economic Association, vol. 75(5), pages 1213-14, December.
  13. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  14. Kormendi, Roger C & Meguire, Philip G, 1984. "Cross-Regime Evidence of Macroeconomic Rationality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(5), pages 875-908, October.
  15. Robert E. Hall, 1988. "A Non-Competitive, Equilibrium Model Of Fluctuations," NBER Working Papers 2576, National Bureau of Economic Research, Inc.
  16. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Working Papers 1906, National Bureau of Economic Research, Inc.
  17. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 3(3), pages 305-316, July.
  18. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 163, Cowles Foundation for Research in Economics, Yale University.
  19. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 241-54, April.
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Cited by:
  1. Robert J. Gordon, 1990. "The Phillips Curve Now and Then," NBER Working Papers 3393, National Bureau of Economic Research, Inc.
  2. Charles T. Carlstrom & Edward N. Gamber, 1991. "Magnification effects and acyclical real wages," Working Paper, Federal Reserve Bank of Cleveland 9105, Federal Reserve Bank of Cleveland.
  3. David Altig, 1992. "An ebbing tide lowers all boats: monetary policy, inflation, and social justice," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q II, pages 14-22.

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