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Back to Keynes?

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  • Frederick Van der Ploeg

Abstract

After a brief review of classical, Keynesian, New Classical and New Keynesian theories of macroeconomic policy, we assess whether New Keynesian Economics captures the quintessential features stressed by J.M. Keynes. Particular attention is paid to Keynesian features omitted in New Keynesian workhorses such as the micro-founded Keynesian multiplier and the New Keynesian Phillips curve. These theories capture wage and price sluggishness and aggregate demand externalities by departing from a competitive framework and give a key role to expectations. The main deficiencies, however, are the inability to predict a pro-cyclical real wage in the face of demand shocks, the absence of inventories, credit constraints and bankruptcies in explaining the business cycle, and no effect of the nominal as well as the real interest rate on aggregate demand. Furthermore, they fail to allow for quantity rationing and to model unemployment as a catastrophic event. The macroeconomics based on the New Keynesian Phillips curve has quite a way to go before the quintessential Keynesian features are captured.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1424.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1424
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Keywords: Keynesian economics; New Keynesian Phillips curve; monopolistic competition; nominal wage rigidity; welfare; pro-cyclical real wage; inventories; liquidity; bankruptcy; unemployment; monetary policy;

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Find related papers by JEL classification:
  • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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Cited by:

  1. Argesanu, Nicolae Razvan, 2012. "Statul de drept din perspectivă economică
    [Rule of law from economic perspective]    ," MPRA Paper 36643, University Library of Munich, Germany.
  2. Roberto Tamborini, 2008. "The macroeconomics of imperfect capital markets. Whither saving-investment imbalances?," Department of Economics Working Papers 0815, Department of Economics, University of Trento, Italia.
  3. repec:dau:papers:123456789/7629 is not listed on IDEAS
  4. Roberto Tamborini, 2006. "Back to Wicksell? In search of the foundations of practical monetary policy," Department of Economics Working Papers 0602, Department of Economics, University of Trento, Italia.
  5. Ronny Mazzocchi & Roberto Tamborini & Hans-Michael Trautwein, 2009. "The Two Triangles: what did Wicksell and Keynes know about macroeconomics that modern economists do not (consider)?," Department of Economics Working Papers 0906, Department of Economics, University of Trento, Italia.

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