Edited by Robert W. Dimand and Harald Hagemann
Chapter 85: New Keynesian macroeconomics
New Keynesian macroeconomics is built from a synthesis of the real business cycles approach and various post-Keynesian (and neoclassical) theories of nominal rigidities, the inclusion of which was necessary to show that monetary demand shocks have real effects in the short run and the medium run. Its key component is optimisation of intertemporal consumption, as in Ramsey’s theory of optimal saving, whereas investment, compared with Keynes’s General Theory, has no strategic role in income determination. Owing to its emphasis on microeconomics and the active role of interest rate policy, which is necessary for preserving dynamic stability, New Keynesian macroeconomics initially gained approval from various camps, but came under attack later. In spite of numerous piecemeal improvements, which added to its formal complexity, New Keynesian macroeconomics still suffers from fundamental flaws, particular with regard to the treatment of the banking system which intermediates between savers and investors in a loanable funds-like style.
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