Econ 488: The Advanced Macro Adventure!

I’ll probably revise this later. I’m saying that now because I don’t really want you to remember it. Let’s face it: I’ve said that exact same thing for nearly every post I’ve done. So there it is. Out of the way, and sure to be remembered because of this unnecessary rant.

I’ve read one and a half of the New Keynesian articles in the Reader thus far, but I fully intend to read all of them… I should considering I have to write about the theory. Regardless, Here:

Mankiw, N. Gregory. 1992. “The reincarnation of Keynesian economics.” European Economic Review 36 (April): 559-65.

This very brief, casually written article describes some of the skepticisms that make New Keynesianism so new and fancy. New Keynesians are allowed to maintain ties to Keynes’ theories while scrutinizing them as they do not consider his work to be flawless. New Keynesians do not consider the General Theory to be an economic bible of sorts, but rather a stepping stone that ought to be considered in later theory. It is to be used in conjunction with more classical approaches. NK theorists do not have a consensus on how effective either fiscal or monetary policy are, but they address evidence that fiscal policy is not as overwhelmingly influential as Keynes suggested it was. Given that the General Theory was in response to the Great Depression. Therefore, the specific economic conditions which inspired it make it exceptionally dated in this regard. NKs also consider monetary policy to have a relatively greater impact on the economy. There is not necessarily a trade off between unemployment and inflation in the long run, and in fact most NKs lean toward a LR natural rate hypothesis. However, there may be such a trade off in the short run, just to screw with policy makers. NK theorists are also skeptical about the benefits of discretionary policy, believing it to be an explanation of high inflation rates (ten times what they were when Keynes was around).

I find it hard to analyze this article, since it’s more or less a list of things New Keynesians don’t do. It makes just about as much sense as analyzing a list of groceries that an individual has decided specifically not to buy. The overall impression that I get from them is that in the long run, policy is more or less ineffective and can only be used to mediate crises in the short run. Mankiw doesn’t say this, but it seems that stabilizing peoples’ long run expectations appears to be the prescription of NK theorists. I suppose that may lead to more stability in the short run, since individuals can focus more on mediating short run fluctuations in the economy without worrying about what’s going to happen ten years down the road.

Snowdon, Brian and Howard Vane. 1995. “New Keynesian economics today: The empire strikes back.” American Economist 39 (Spring): 48-65.

Old-school Keynesians brought the “visible hand” that is government into the picture of macroeconomic theory. If that were an actual picture, it would be like taking a utilitarian-looking shadowbox of a factory machine with gears and all that jazz and splattering it with grime and grease paint and permanent ink. Classicals argued that the invisible hand performed magic and equilibrated the economy; Keynesians argued that markets do not self-equilibrate, and therefore the government can be used for that purpose. New Keynesians focus more on assumptions related to overall efficiency as opposed to equilibration. New classicals and cyclists argue that consumers adjust the quantities of items they purchase depending on prices, NK theorists argue that firms adjust their behavior on behalf of demand shocks. New Keynesians also assume imperfect competition and information with variable transaction costs, creating inflexibility in the form of nominal wages and prices and real variables (not specified in this article).

From this point onward, the authors interview Mankiw on his views. While interesting and different from other things I’ve read of his, I don’t feel like writing about them (mostly because I haven’t entirely finished reading that part). The term “Monopolistically competitive” came up in the reading. Any ideas about what that means? Maybe? As of now, my general impression of how NK theorists have impacted macro theory as a whole mirrors how I view Keynes as having effected classical theory. cyclists were trying to make everything seem nice and rational with their silly assumptions… And then the New Keynesians crashed their party with reality (kind of like the way Green Peace throws blood on peoples’ furs, I should imagine).

I’m done.