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

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  • Cukierman, Alex

Abstract

After a brief review of the main differences between New and Old Keynesian economics from the 1960s this paper focuses on a tension between traditional sluggish measures of potential output commonly used by policy-makers 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 policy-makers 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.

Suggested Citation

  • Cukierman, Alex, 2005. "Keynesian Economics, Monetary Policy and the Business Cycle - New and Old," CEPR Discussion Papers 5284, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5284
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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

    Keywords

    Relative variability of actual and potential output under flexible versus sticky prices and wages; Welfare ranking of sticky versus flexible prices and wages under monopolistic competition;

    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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