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Keynesian Economics, Monetary Policy and the Business Cycle – New and Old

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  • Alex Cukierman

Abstract

After a brief review of the main differences between New and Old Keynesian economics from the sixties this paper focuses on a tension between traditional sluggish measures of potential output commonly used by policymakers and the New Keynesian (NK) notion of this variable which conceptualizes it as the level of output that would have been produced under perfect competition had all prices and wages been flexible. The paper shows that, under monopolistic competition, NK potential output is often more volatile than the level of output produced under sticky prices and wages implying either of the following. Real life policymakers mistakenly target smooth versions of output or (since actual economies are monopolistically rather than perfectly competitive) the flexible price and wage equilibrium does not necessarily maximize welfare. The paper shows, that depending on the shape of the utility function and of the distribution of productivity shocks either case is possible and proposes a criterion for discriminating between them. (JEL E3, E4, E5, E6)

Suggested Citation

  • Alex Cukierman, 2005. "Keynesian Economics, Monetary Policy and the Business Cycle – New and Old," CESifo Economic Studies, CESifo Group, vol. 51(4), pages 697-728.
    • Handle: RePEc:oup:cesifo:v:51:y:2005:i:4:p:697-728.
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    File URL: http://hdl.handle.net/10.1093/cesifo/51.4.697
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    Cited by:

    1. Alex Cukierman, 2009. "The Limits of Transparency," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 38(1‐2), pages 1-37, February.
    2. Cukierman, Alex, 2008. "Central bank independence and monetary policymaking institutions -- Past, present and future," European Journal of Political Economy, Elsevier, vol. 24(4), pages 722-736, December.
    3. Frederick van der Ploeg, 2005. "Back to Keynes?," CESifo Economic Studies, CESifo Group, vol. 51(4), pages 777-822.
    4. Alex Cukierman, 2006. "Should the Bank of Israel have a growth target? What are the issues?," Israel Economic Review, Bank of Israel, vol. 4(2), pages 1-18.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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