New Classical Economics

We turn our attention to the role of money for determining nominal magnitudes. Using US data, we find that the aggregate “nominal output plus and stock market capitalisation” is closely related to the money stock, lending support to one of Milton Friedman’s key monetarist propositions. This finding should be particularly important for ECB monetary policy: an inflation-free euro plays a

Define and explain the Policy Ineffectiveness Proposition. Discuss how the length and the staggering of wage contract can make monetary policy effective even if expectations are rational. Can you find real world evidence that wage setting matters for the effectiveness of monetary policy?

My friend and sometime co-author the late Meyer Louis Burstein held a J.D. and PhD in economics from the University of Chicago, where he studied under Milton Friedeman and Frank Knight. http://prabook.org/web/person-view.html?profileId=953256  His many books remain in high demand on Amazon http://www.amazon.com/M.-L.-Burstein/e/B001JRVHIM
I had nothing to do with the writing, but the author left me the only known copy. I will post other chapters here and hope to publish the whole volume as an e-book on Amazon, with his wife's blessing.

The Financial Crisis of 2008, and the Great Recession in its wake, have shaken up macroeconomics. The paradigm of the “New” Neoclassical Synthesis, which seemed to provide a robust framework of analysis for short‐run macro not long ago, fails to capture key elements of the recent crisis. This paper reviews the current reappraisal of the paradigm in the light of the history of macroeconomic thought. Twice in the past 80 years, a major macroeconomic crisis led to the breakthrough of a new paradigm that was to capture the imagination of an entire generation of macroeconomists. This time is different. Whereas the pre‐crisis consensus in the profession is broken, a sweeping transition to a single new paradigm is not in sight. Instead, macroeconomics is in the process of loosening the methodological straightjacket of the “New” Neoclassical Synthesis, thereby opening a door for a return to its original purpose: the study of information and coordination in a market economy.

Belying the IMF’s reputation as a bastion of neo-liberal policy orthodoxy, this article analyses important yet contingent transformations in IMF fiscal policy thinking which constituted a key intervention in international austerity debates. Applying only to advanced economies, and in the specific post-crash conditions, the Fund came to champion fiscal policy as a more potent and effective counter-cyclical tool. Analysis focuses on alterations to modelling assumptions and analytical techniques, beginning before the crash but accelerating after it, which intellectually bolstered this view. It finds the Fund’s rediscovery of some older (Keynesian) assumptions was both longer in germination and more enduring than some have recognised. It also charts the reconciliation of this contingent Keynesianism to ‘congenital’ IMF concerns for fiscal sustainability. It highlights the variety of economic insights, often with vastly differing policy implications, found within the Fund, and indeed within mainstream macroeconomics. It builds on work questioning the stability, consistency and coherence of economic ideas suggested by the paradigm framework, and identifies limitations of a paradigm lens for understanding incremental IMF ideational change. It contributes to politics of economic ideas scholarship in highlighting the importance of economic method and modelling assumptions as sites of contestation within gradual but meaningful ideational change.

For four decades, economics has been confronted with two major flaws: the large theoretical gap between macroeconomic and microeconomic analysis, and the growing rates of both inflation and unemployment. Research seemed divided between two opposite approaches, searching for a new theory to solve the macro imbalances in modern economies. In this context, we start with the analysis and evaluation of the main theoretical contributions during the past decades: rational expectations, market-clearing models and rigidities. Then we investigate how this considerable theoretical progress has managed to influence economic policies. The theoretical part of the paper uses formal analysis and synthesis, comparison and interpretation regarding recent progress in economics. In the second part, we bring empirical evidence from several countries to point out the impact of these developments at the policy level. We conclude that today the ideological division seems to have vanished; new theories don&...