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Monetary Policy in the New Classical Framework

In: The Theory of New Classical Macroeconomics

Author

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  • Peter Galbács

    (Budapest Business School)

Abstract

Having come to the end of theoretical preparation, it is possible in this and the following chapter to appreciate monetary and fiscal policy proposals of new classical macroeconomics. The starting point is the Phillips curve provided by Milton Friedman. Two implicit and arbitrary (i.e. non-abstracted) assumptions are revealed in Chap. 4: they are, first, an asymmetrical information dominating on both sides of labour market; and, second, a different flexibility of prices and wages. In order to scrutinize the effects of these presumptions, the Phillips story unfolds on a different set of assumptions. The new classical Phillips curve is introduced as a later development of this intermediate state. By analysing the islands of Lucas and on the ground of the Keynesian critique, the exact circumstances are identified and separated under which discretional monetary policy can or cannot be effective. The business cycle theory is also reviewed and, considering its assumptions and consistency, it is argued that not only unexpected policy interventions can be effective if the possibility of multi-period (non-white-noise) business cycles is postulated.

Suggested Citation

  • Peter Galbács, 2015. "Monetary Policy in the New Classical Framework," Contributions to Economics, in: The Theory of New Classical Macroeconomics, edition 127, chapter 0, pages 149-219, Springer.
    • Handle: RePEc:spr:conchp:978-3-319-17578-2_4
    DOI: 10.1007/978-3-319-17578-2_4
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