The Relationship of Micro and Macroeconomics in Historical Perspective
Chapter 5: Microfoundations: A Decisive Dividing Line between Keynesian and New Classical Macroeconomics?
Michel De Vroey INTRODUCTION The transition from Keynesian IS-LM macroeconomics to dynamic stochastic macroeconomics deserves to be labeled as a scientific revolution à la Kuhn. This expression refers to an episode in the history of a discipline where a period of normal science is disturbed by the persistent existence of apparently insoluble puzzles and a drive to push the agenda and the research methods in new directions. This is accompanied by thundering declarations of war (for example, Keynesian theory is dead), a confrontation between the young and the old generation, the rise of new stars in the profession and the eclipse of old ones. The relevance of the scientific revolution hinges on the existence of a ‘before’ and an ‘after’, with a well-delineated series of events in between, so that the type of work members of the community are engaged in after the revolution bears little resemblance to earlier practices. The revolution in macroeconomics resulted from a sequence of episodes related both to the intricacies of the internal development of the discipline and to outside events. Friedman (1968) and Lucas ( 1981) recounted the story of the real effects of monetary expansion in a non-Keynesian way, thereby disqualifying the policy-menu idea associated with the Phillips curve. The emergence of stagflation in the 1970s was proclaimed to be a real-time experiment that confirmed Friedman’s predictions about the inability of monetary policy to have a long-lasting effect on employment (Friedman 1968). Lucas and Rapping’s work (1969) extending the sphere of equilibrium analysis began...
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