Extract

At its heyday in the 1980s, new classical macroeconomics (NCM) was widely considered to have accomplished the monetarist campaign against Keynesianism. This campaign had been driven most forcefully by Friedman (1968) in his well-known presidential address to the American Economic Association: monetary policy cannot establish and maintain any inflation–unemployment combination on a given Phillips curve at will, because adaptive inflation expectations let the curve shift upwards (in case of an expansionary monetary impulse). Thus there is no Phillips curve trade-off in the long run; there is only the choice between high or low inflation at the given level of the non-accelerating inflation rate of unemployment (NAIRU), that is, the level of the unemployment rate that represents a macroeconomic equilibrium of the labour market, ruling out excess demand or excess supply pressure on wage inflation. As Friedman left no doubt that he discussed a scenario where policy aimed to keep unemployment below the natural rate, it remains a mystery why Keynesians felt the need to object to this monetarist attack. The “discovery” that money growth beyond the point of full employment will necessarily lead to inflation without increasing output can already be found in the General Theory (Keynes 1936 [1973]: 303). There is hardly any deviation from Friedman’s acceleration principle, although it has to be conceded that a systematic treatment of inflation expectation is missing in Keynes (but note that trend inflation is a post-World War II phenomenon).