Chapter 4: Dead or Alive? The Ebbs and Flows of Keynesianism Over the History of Macroeconomics
Michel DeVroey INTRODUCTION A fine way to make sense of the history of a given discipline is to bring out the milestones that marked its unfolding. When it comes to macroeconomics, the subject of this chapter, two such milestones come to mind at once. The first is of course John Maynard Keynes’s The General Theory of Employment, Interest, and Money (1936). While Keynes’s book was the fountainhead of the new discipline, the direction that it took was shaped by Hicks when he devised the IS-LM model. The second benchmark is the radical transformation that this discipline underwent in the late 1970s and early 1980s with the overthrowing of Keynesian macroeconomics and its replacement by what later became called dynamic stochastic general equilibrium (DSGE) macroeconomics, under Robert Lucas’s leadership. My aim in this chapter is to recount these developments.1 I start with describing the emergence of Keynesian macroeconomics and move to explaining its fall under Friedman’s and Lucas’s successive attacks. Next, I discuss the emergence of new classical macroeconomics, the first instalment of the DSGE approach. I then assess the eventually vain attempts of new Keynesian economists to refute Lucas’s claims. I study the real business cycle models initiated by Kydland and Prescott, which transformed Lucas’s qualitative style of modelling into a quantitative style. Finally, I examine a further transformation within DSGE approach, models that are labelled either as new neoclassical synthesis or New Keynesian Phillips curve models. The chapter concludes with an examination of the question of the present crisis...
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