New classical macroeconomics
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New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.
New classical macroeconomics strives to provide neoclassical microeconomic foundations for macroeconomic analysis. This is in contrast with its rival
History
Classical economics is the term used for the first modern school of economics. The publication of Adam Smith's The Wealth of Nations in 1776 is considered to be the birth of the school. Perhaps the central idea behind it is on the ability of the market to be self-correcting as well as being the most superior institution in allocating resources. The central assumption implied is that all individuals maximize their utility.
The so-called
The neoclassical school dominated the field up until the Great Depression of the 1930s. Then, however, with the publication of The General Theory of Employment, Interest and Money by John Maynard Keynes in 1936,[2] certain neoclassical assumptions were rejected. Keynes proposed an aggregated framework to explain macroeconomic behavior, leading thus to the current distinction between micro- and macroeconomics. Of particular importance in Keynes' theories was his explanation of economic behavior as also being led by "animal spirits". In this sense, it limited the role for the so-called rational (maximizing) agent.
The Post-World War II period saw the widespread implementation of Keynesian economic policy in the United States and Western European countries. Its dominance in the field by the 1970s was best reflected by the controversial statement attributed to US President Richard Nixon and economist Milton Friedman: "We are all Keynesians now".
Problems arose during the
Emergence in response to stagflation
The New Classical school emerged in the 1970s as a response to what were perceived as failures of Keynesian economics to explain stagflation. New Classical and monetarist criticisms led by
After the 1970s, the New Classical school for a while became the dominant school in Macroeconomics.
New neoclassical synthesis
Prior to the late 1990s, macroeconomics was split between new Keynesian work on market imperfections demonstrated with small models and new classical work on
The new synthesis took elements from both schools. New classical economics contributed the methodology behind real business cycle theory
Analytic method
The new classical perspective takes root in three diagnostic sources of fluctuations in growth: the productivity wedge, the capital wedge, and the labor wedge. Through the neoclassical perspective and business cycle accounting one can look at the diagnostics and find the main ‘culprits’ for fluctuations in the real economy.
- A productivity/efficiency wedge is a simple measure of aggregate production efficiency. In relation to the Great Depression, a productivity wedge means the economy is less productive given the capital and labor resources available in the economy.
- A capital wedge is a gap between the intertemporal marginal rate of substitution in consumption and the marginal product of capital. In this wedge, there's a “deadweight” loss that affects capital accumulation and savings decisions acting as a distortionary capital (savings) tax.
- A labor wedge is the ratio between the marginal rate of substitution of consumption for leisure and the marginal product of labor and acts as a distortionary labor tax, making hiring workers less profitable (i.e. labor market frictions).
Foundation, axioms and assumptions
New classical economics is based on
New classical economics has also pioneered the use of representative agent models. Such models have received severe neoclassical criticism, pointing to the disjuncture between microeconomic behavior and macroeconomic results, as indicated by Alan Kirman.[9]
The concept of
Legacy
It turned out that pure new classical models had low explanatory and predictive power. The models could not simultaneously explain both the duration and magnitude of actual cycles. Additionally, the model's key result that only unexpected changes in money can affect the business cycle and unemployment did not stand empirical tests.[12][13][14][15][16]
The mainstream turned to the
Peter Galbács thinks that critics have a superficial and incomplete understanding of the new classical macroeconomics. He argues that one should not forget the conditional character of the new classical doctrines. If prices are completely flexible and if public expectations are completely rational and if real economic shocks are white noises, monetary policy cannot affect unemployment or production and any intention to control the real economy ends up only in a change in the rate of inflation. However, and this is the point, if any of these conditions does not hold, monetary policy can be effective again. So, if any of the conditions necessary for the equivalence does not hold, countercyclical fiscal policy can be effective. Controlling the real economy is possible perhaps in a Keynesian style if government regains its potential to exert this control. Therefore, actually, new classical macroeconomics highlights the conditions under which economic policy can be effective and not the predestined inefficiency of economic policy. Countercyclical aspirations need not to be abandoned, only the playing-field of economic policy got narrowed by new classicals. While Keynes urged active countercyclical efforts of fiscal policy, these efforts are not predestined to fail not even in the new classical theory, only the conditions necessary for the efficiency of countercyclical efforts were specified by new classicals.[19]
See also
References
- ISBN 1-84542-208-2
- .
- ^ Blanchard 2000, p. 1404.
- ^ Mankiw, N. Gregory (May 2006). "The Macroeconomist as Scientist and Engineer" (PDF). pp. 14–15.
- ^ a b c Goodfriend, Marvin and King, Robert G. The New Neoclassical Synthesis and The Role of Monetary Policy. Federal Reserve Bank of Richmond. Working papers. June 1997. No. 98–5. http://www.richmondfed.org/publications/research/working_papers/1998/pdf/wp98-5.pdf.
- ^ Kocherlakota 2010, p. 12.
- ^ a b Mankiw, N. Gregory (May 2006). "The Macroeconomist as Scientist and Engineer" (PDF).
- ^ a b Woodford, Michael. Convergence in Macroeconomics: Elements of the New Synthesis. January 2008. http://www.columbia.edu/~mw2230/Convergence_AEJ.pdf.
- JSTOR 2138411.
- JSTOR 1909635.
- .
- ^ S2CID 154761891.
- .
- .
- ^ Mark Thoma, New Classical, New Keynesian, and Real Business Cycle Models, Economist's View
- S2CID 153260374.
- ^ Mankiw, N. Greg. The Macroeconomist as Scientist and Engineer. May 2006. p. 14–15. http://scholar.harvard.edu/files/mankiw/files/macroeconomist_as_scientist.pdf?m=1360042085.
- ^ Kevin Hoover (2008). "New Classical Macroeconomics", econlib.org
- ISBN 978-3-319-17578-2.
Further reading
- Artis, Michael (1992). "Macroecononomic Theory". In Maloney, John (ed.). What's New in Economics?. New York: Manchester University Press. pp. 135–167. ISBN 978-0-7190-3280-6.
- doi:10.3386/w2982.
- ISBN 978-0-631-14605-6.
External links
- OCLC 237794267.