New and Old Keynesians
The purpose of this paper is to describe one strand of New Keynesian literature which explores how increased flexibility of wages and prices might exacerbate the economy's downturn, and to contrast it with other strands of New Keynesian literature. This strand of literature holds that even if wages and prices were perfectly flexible, output and employment would be highly volatile. It sees the economy as amplifying the shocks that it experiences and making their effects persist. It identifies incomplete contracts, and, in particular, imperfect indexing, as central market failures, and it attempts both to explain the causes and consequences of these market failures. The models described here contain three basic ingredients: risk-averse firms; a credit allocation mechanism in which credit-rationing, risk-averse banks play a central role; and new labor market theories, including efficiency wages and insider-outsider models. These building blocks should help to explain how price flexibility contributes to macroeconomic fluctuations and to unemployment. In particular, the first two building blocks will explain why small shocks to the economy can give rise to large changes in output, while the new labor market theories will explain why those changes in output (with their associated changes in the demand curve for labor) result in unemployment.
Volume (Year): 7 (1993)
Issue (Month): 1 (Winter)
|Contact details of provider:|| Web page: https://www.aeaweb.org/jep/|
More information through EDIRC
|Order Information:||Web: https://www.aeaweb.org/subscribe.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 543-569.
- Bruce C. Greenwald & Joseph E. Stiglitz, 1993.
"Financial Market Imperfections and Business Cycles,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 108(1), pages 77-114.
- Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc.
- Newbery, David M G & Stiglitz, Joseph E, 1985.
"Wage Rigidity, Implicit Contracts, Unemployment and Economic Efficiency,"
CEPR Discussion Papers
67, C.E.P.R. Discussion Papers.
- Newbery, David M & Stiglitz, Joseph E, 1987. "Wage Rigidity, Implicit Contracts, Unemployment and Economic Efficiency," Economic Journal, Royal Economic Society, vol. 97(386), pages 416-30, June.
- Russell Cooper, 1990. "Predetermined Wages and Prices and the Impact of Expansionary Government Policy," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 205-214.
- Plosser, C.I., 1989.
"Understanding Real Business Cycles,"
89-03, Rochester, Business - General.
- Mankiw, N Gregory, 1989.
"Real Business Cycles: A New Keynesian Perspective,"
Journal of Economic Perspectives,
American Economic Association, vol. 3(3), pages 79-90, Summer.
- Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
- Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
- Charles W. Calomiris, 1993. "Financial Factors in the Great Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 61-85, Spring.
When requesting a correction, please mention this item's handle: RePEc:aea:jecper:v:7:y:1993:i:1:p:23-44. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)or (Michael P. Albert)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.