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Broadening The Theory Of Aggregate Supply: A "New Critical" Proposal

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  • David Laibman

    (Program in Economics, Graduate School, City University of New York)

Abstract

In a proposed "New Critical" dual to the standard New Classical view of the labor market, the money wage rate is given, but the real supply of labor is sensitive to the real wage (the "Dobb Effect"). Expansionary policy raises the price level, lowering the real wage rate and forcing workers to supply more labor. The long-run aggregate supply curve is horizontal. A preliminary synthesis of the New Classical and New Critical models produces a positive multiplier. This broader view of the labor market suggests that neither the "policy ineffectiveness" extreme nor the "fine tuning" extreme constitutes an adequate basis for macroeconomic policy.

Suggested Citation

  • David Laibman, 2006. "Broadening The Theory Of Aggregate Supply: A "New Critical" Proposal," Eastern Economic Journal, Eastern Economic Association, vol. 32(2), pages 241-257, Spring.
    • Handle: RePEc:eej:eeconj:v:32:y:2006:i:2:p:241-257
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    References listed on IDEAS

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    2. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184, National Bureau of Economic Research, Inc.
    3. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-746, November.
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