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The ‘modern’ view of macroeconomics: some critical reflections

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  • Alfonso Palacio-Vera

Abstract

David Romer has proposed a new basic macroeconomic framework: the IS--MP--IA model. Its proponents claim that it represents the 'modern' view of macroeconomics. We show that the new framework remains closely attached to the neoclassical synthesis and, in addition, does not take account of: (i) the empirical evidence on the output--inflation trade-off; (ii) the evidence on the interdependence of aggregate demand and supply; (iii) the institutional limits of monetary policy; and (iv) the implications for macroeconomic policy of (i), (ii) and (iii). Once these aspects have been incorporated, short-run stabilisation policy is not neutral in the long run, the notion of a 'natural' rate of interest becomes untenable and aggregate demand turns into the crucial exogenous variable. Copyright 2005, Oxford University Press.

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  • Alfonso Palacio-Vera, 2005. "The ‘modern’ view of macroeconomics: some critical reflections," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 29(5), pages 747-767, September.
    • Handle: RePEc:oup:cambje:v:29:y:2005:i:5:p:747-767
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    File URL: http://hdl.handle.net/10.1093/cje/bei039
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    Cited by:

    1. J.W. Mason & Arjun Jayadev, 2015. "Lost in Fiscal Space: Some Simple Analytics of Macroeconomic Policy in the Spirit of Tinbergen, Wicksell and Lerner," Working Papers 2015_05, University of Massachusetts Boston, Economics Department.
    2. Vasiliki Bozani, 2011. "NAIRU, Unemployment and Post Keynesian Economics," Working Papers 1104, University of Crete, Department of Economics.
    3. Eckhard Hein & Engelbert Stockhammer, 2010. "Macroeconomic Policy Mix, Employment and Inflation in a Post-Keynesian Alternative to the New Consensus Model," Review of Political Economy, Taylor & Francis Journals, vol. 22(3), pages 317-354.
    4. Eckhard Hein & Achim Truger, 2011. "Fiscal Policy in the Macroeconomic Policy Mix: A Critique of the New Consensus Model and a Comparison of Macroeconomic Policies in France, Germany, the UK and Sweden from a Post-Keynesian Perspective," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 12, Edward Elgar Publishing.
    5. Engelbert Stockhammer, 2008. "Is The Nairu Theory A Monetarist, New Keynesian, Post Keynesian Or A Marxist Theory?," Metroeconomica, Wiley Blackwell, vol. 59(3), pages 479-510, July.
    6. Alfonso Palacio Vera, 2008. "The "New consensus"and the Post-Keynesian approach to the analysis of liquidity traps," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 08-03, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.

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