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The Two Triangles: what did Wicksell and Keynes know about macroeconomics that modern economists do not (consider)?

  • Ronny Mazzocchi

    ()

  • Roberto Tamborini

    ()

  • Hans-Michael Trautwein

    ()

The current consensus in macroeconomics, as represented by the New Neoclassical Synthesis, is to work within frameworks that combine intertemporal optimization, imperfect competition and sticky prices. We contrast this “NNS triangle” with a model in the spirit of Wicksell and Keynes that sets the focus on interest-rate misalignments as problems of intertemporal coordination of consumption and production plans in imperfect capital markets. We show that, with minimal deviations from the standard perfect competition model, a model structure can be derived that looks similar to the NNS triangle, but yields substantially different conclusions with regard to the dynamics of inflation and output gaps and to the design of the appropriate rule for monetary policy.

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Paper provided by Department of Economics, University of Trento, Italia in its series Department of Economics Working Papers with number 0906.

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Date of creation: 2009
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Handle: RePEc:trn:utwpde:0906
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  1. Goodfriend, Marvin, 2002. "Monetary Policy in the New Neoclassical Synthesis: A Primer," International Finance, Wiley Blackwell, vol. 5(2), pages 165-91, Summer.
  2. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  3. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  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. Woodford, Michael, 2006. "Comments on the Symposium on Interest and Prices," Journal of the History of Economic Thought, Cambridge University Press, vol. 28(02), pages 187-198, June.
  6. Boianovsky, Mauro & Trautwein, Hans-Michael, 2006. "Wicksell after Woodford," Journal of the History of Economic Thought, Cambridge University Press, vol. 28(02), pages 171-185, June.
  7. Frederick Van der Ploeg, 2005. "Back to Keynes?," CESifo Working Paper Series 1424, CESifo Group Munich.
  8. Laidler, David, 2006. "Woodford and Wicksell on Interest and Prices: The Place of the Pure Credit Economy in the Theory of Monetary Policy," Journal of the History of Economic Thought, Cambridge University Press, vol. 28(02), pages 151-159, June.
  9. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  10. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series 2003-11, Board of Governors of the Federal Reserve System (U.S.).
  11. Miguel Casares & Bennett T. McCallum, 2000. "An Optimizing IS-LM Framework with Endogenous Investment," NBER Working Papers 7908, National Bureau of Economic Research, Inc.
  12. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  13. Olivier Blanchard, 2000. "What do we know about Macroeconomics that Fisher and Wicksell did not?," NBER Working Papers 7550, National Bureau of Economic Research, Inc.
  14. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  15. Brakman, Steven & Heijdra, Ben J., 2002. "The monopolistic competition revolution in retrospect," CCSO Working Papers 200215, University of Groningen, CCSO Centre for Economic Research.
  16. Howitt, Peter, 1992. "Interest Rate Control and Nonconvergence to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 776-800, August.
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