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Schools of Thought

New Keynesian Economics

Keynesian, New Keynesian and Post-Keynesian Economics

New Keynesian economics is a school of macroeconomics that supplies rigorous microeconomic foundations for Keynesian conclusions, real economic effects from demand shocks, and a role for stabilization policy, using the same rational-expectations toolkit New Classical economists built. Where New Classical models assume markets clear continuously through flexible prices, New Keynesian models assume imperfect competition in price and wage setting, so prices and wages are 'sticky' and adjust only gradually. Stanley Fischer's 1977 sticky-information model and John B. Taylor's 1979-80 staggered wage-setting framework were early formalizations; Guillermo Calvo's 1983 staggered-price-contracts model became the field's standard workhorse. The approach dominates mainstream central-bank macroeconomic modeling today, including the dynamic stochastic general equilibrium (DSGE) models most major central banks use for policy analysis.

Facts
Start Year
1977 1
Dated to Stanley Fischer's 1977 sticky-information paper, the field's first formal model; Calvo's 1983 staggered-contracts model became the field's later standard.
Core Tenet
Rational, forward-looking agents (shared with New Classical economics) combine with imperfect competition and sticky prices and wages (a genuine market failure) to explain why demand shocks have real, persistent effects and why stabilization policy can work. 1
Connections

Associated Figures and Events

Source Joseph Stiglitz (Wikipedia)
Source Paul Krugman (Wikipedia)

Held Differently

Keynesian Economics, Schools of Thought

New Keynesian economics preserves the original Keynesian conclusion, that demand shocks have real effects and stabilization policy can help, but replaces its ad hoc assumptions with explicit microeconomic foundations original Keynesian theory lacked.

Source Wikipedia

Critiqued Here

New Classical Economics, Schools of Thought

Why this is disputed. Both schools share the rational-expectations toolkit; the live dispute is whether markets clear continuously through flexible prices (New Classical) or only gradually because of sticky prices and wages from imperfect competition (New Keynesian), a difference with directly opposed policy implications for whether stabilization policy can work.

Source Wikipedia
Sources
1. Wikipedia
Wikimedia Foundation
  • New Keynesian economics, lead section
    New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics.
  • New Keynesian economics, Market imperfections
    New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume that there is imperfect competition in price and wage setting to help explain why prices and wages can become sticky.
  • New Keynesian economics, History
    Stanley Fischer (1977): Developed the first sticky information model
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Paul Krugman (Wikipedia)
Wikimedia FoundationAssociated Figures and Events: Paul Krugman, Lead section
Quote, Associated Figures and Events: Paul Krugman, Lead section
In 2008, Krugman was the sole winner of the Nobel Memorial Prize in Economic Sciences for his contributions to new trade theory and new economic geography.
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Joseph Stiglitz (Wikipedia)
Wikimedia FoundationAssociated Figures and Events: Joseph Stiglitz, Lead section
Quote, Associated Figures and Events: Joseph Stiglitz, Lead section
He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979).
View the Source

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