New Keynesianism

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The New Keynesian Economics or New Keynesian economics is an economic theory that neoclassical combined equilibrium models with Keynesian price and wage rigidities. New Keynesianism replaces the conventional neoclassical synthesis with microfounded total models ( New Neoclassical Synthesis ). He emphasizes the effectiveness of monetary policy measures, especially in the form of interest rate control.

New Keynesianism emerged in the 1980s and is now part of the international macroeconomic mainstream. While the economic debate in the 1970s was still marked by the controversy between Keynesianism and monetarism , the focus since the 1980s has been on the debate between New Keynesianism, Neo-Keynesianism (which rejects neoclassical equilibrium models as unrealistic) and the New Classical Macroeconomics (which the Rejects acceptance of market imperfections).


With the General Theory of Employment, Interest and Money from 1936, John Maynard Keynes tried to draw the theoretical and economic-political consequences of the Great Depression. However, the work is considered difficult to understand even among economists. With the 1937 IS-LM model , John R. Hicks provided a simplistic interpretation of the general theory. The IS-LM model (later modified and expanded) became part of the neoclassical synthesis , which in turn was gratefully received by the vast majority of economists, because on the one hand the failure of the 1930s could be thrown off and on the other hand the neoclassical world of thought was preserved. The compromise of the neoclassical synthesis resulted in the fact that the neoclassic applies in the long term, but Keynesian disturbances can become relevant in the short term. According to this, markets with flexible prices and wages lead to full employment and a Pareto-optimal state. Price and wage rigidities can, however, hinder or prevent the necessary adjustment and thus block the reduction of unemployment or delay it for an unacceptably long time. The neoclassical synthesis only partially coincides with Keynes' ideas. For decades it was the absolutely dominant structure of economic thought.

In the 1970s the phenomenon of stagflation emerged , the neoclassical synthesis failed to explain the phenomenon of increased inflation. The Monetarism rose to become the dominant economic theory because he could explain that the money supply affects inflation. Monetarism says that economic growth and moderate inflation can be kept at a stable level if the money supply remains in the correct ratio to nominal GDP (money supply control). To control the amount of money, however, it is necessary to be able to predict the speed of money circulation . In the past, the speed of money circulation has followed a roughly linear trend. Due to the deregulation of the banking system, the introduction of overnight money accounts and financial innovations, however, since the 1980s there have been unpredictable and sometimes extreme fluctuations in the velocity of money. As a result, a clear connection between the money supply and nominal GDP disappeared. This questioned the usefulness of money supply management, and many economists turned away from monetarism. In the 1980s, the New Classical Macroeconomics became dominant in the short term. With the theory of rational expectations , which also postulates efficient financial markets in a microeconomic form , it is even more market-fundamental than monetarism. Its founder, Robert E. Lucas , declared Keynesianism to be dead in 1980:

“One cannot find good under-forty economists who identify themselves or their work as keynesian. Indeed, people even take offense of referred to as Keynesians. At research seminars, people don't take Keynesian theorising seriously any more; the audience starts to whisper and giggle at one another. "

“You can't find a good economist under forty who describes himself or his work as Keynesian. In fact, people even get bothered by being referred to as Keynesians. Keynesian theory is no longer taken seriously in seminars; the listeners start to whisper and giggle. "

It was at this point that the New Keynesians began their research. The Phillips curve was about inflation expectations extends to the New Keynesian Phillips curve. Instead of the total models of neoclassical synthesis, micro-founded total models were developed. The fact that New Keynesianism dominates North American macroeconomics today is due, on the one hand, to the fact that more and more empirical evidence contrary to the theories of the New Classical Macroeconomics and Monetarism is being collected and, on the other hand, the New Keynesian models explain the stylized facts of the business cycle better than other models .

Basic model and monetary policy

The basic model of New Keynesianism is characterized by rational future expectations on both the demand and the supply side. The demand side is described by a dynamic IS equation based on the Euler equation of consumption . The supply side is described by the New Keynesian Phillips curve , which is dependent on the expected future inflation rate .

In contrast to traditional Keynesian total models, New Keynesianism follows the Taylor rule . Since the nominal interest rate is already taken into account in the IS equation, an independent money market equation ( LM function ) is not required.

For monetary policy , it follows that New Keynesianism (unlike classical Keynesianism and monetarism) does not recommend money supply control, but rather rule-based interest rate control according to the Taylor rule .

Microfoundation of award winners

New Keynesianism is based on DSGE models , but differs fundamentally from the New Classical Macroeconomics. The models of the real business cycle theory (New Classical Macroeconomics) are not able to explain the stylized facts of inflation, unemployment and output due to the unrealistic assumption of perfect competition. New Keynesian models therefore take into account that companies do not immediately and completely adapt their prices to changed market situations ( sticky prices ) and that wages do not react quickly to changes in the labor market ( sticky wages ). In classical Keynesianism, rigid wages are e.g. B. justified with the nominal wage illusion of employees. Robert E. Lucas had criticized these assumptions for the fact that it was only an ad hoc assumption about the behavior of people that was not methodologically supported. The u. a. New Classical Macroeconomics , founded by Lucas, is based on the rational expectations of market participants and comes to the conclusion that there is complete price and wage flexibility, so that economic fluctuations can only have exogenous reasons and there can be no involuntary unemployment. New Keynesianism is also based on rational expectations, but presents various rational reasons for the fact that there is still a lack of prizes:

  • Wages are often fixed for a longer time horizon
  • Consumption habits change only slowly
  • Information is expensive and difficult to obtain
  • Business investments cause adjustment costs
  • Price changes cause adjustment costs ( menu effect )
  • due to contractual obligations such as B. Delivery contracts or collective agreements, price adjustments are only made at different times (staggered pricing)
  • Hysteresis (economics)
  • Failure of coordination

In contrast to the neoclassical theory, a perfect market is not assumed, which in reality only rarely exists, but monopolistic competition .

Further market failure

The New Keynesian models sometimes consider the following market failures :

Individual evidence

  1. ^ A b c New Keynesianism In: Gabler Wirtschaftslexikon.
  2. a b What is Neo-Keynesianism? In: Handelsblatt. March 11, 2008.
  3. Gabler Wirtschaftslexikon, New Classical Macroeconomics
  4. a b Michael Heine, Hansjörg Herr: Economics: Paradigm-oriented introduction to micro- and macroeconomics. Oldenbourg Verlag, 2012, ISBN 978-3-486-71523-1 , pp. 507-508.
  5. ^ International Monetary Fund , Sarwat Jahan and Chris Papageorgiou What Is Monetarism? , Finance & Development, Vol. 51, No. March 1, 2014.
  6. Michael Heine, Hansjörg Herr, Economics: Paradigm-Oriented Introduction to Micro- and Macroeconomics. Oldenbourg Verlag, 2012, ISBN 978-3-486-71523-1 , p. 508.
  7. Lothar Funk, Eckgard Knappe: The contribution of New Keynesianism to the explanation of unemployment in Europe. in: Hamburg Yearbook for Economic and Social Policy. 41st year, Mohr Siebeck, ISBN 978-3-16-146651-9 , p. 45.
  8. ^ Springer Gabler Verlag, Gabler Wirtschaftslexikon, New Keynesian Macroeconomics, dynamic basic model
  9. Peter Flaschel, Gangolf Groh, Hans-Martin Krolzig, Christian Proaño, Keynesian macroeconomics: interest rate, employment, inflation and growth , Springer-Verlag, 2012, ISBN 978-3-642-27424-4 , page 390
  10. ^ Russell Cooper, John, Andrew: Coordinating coordination failures in Keynesian models . In: The Quarterly Journal of Economics, Vol. 103, No. 3 (Ed.): Quarterly Journal of Economics . 103, No. 3, 1988, pp. 441-463. JSTOR 1885539 1885539 . doi : 10.2307 / 1885539 .
  11. Ben Bernanke, Gertler, Mark: Agency Costs, Net Worth, and Business Fluctuations . In: The American Economic Review, Vol. 79, No. 1 (Ed.): American Economic Review . 79, No. 1, 1989, pp. 14-31. JSTOR 1804770 1804770 .
  12. Nobuhiro Kiyotaki, Moore, John H .: Credit cycles . In: Journal of Political Economy . 105, No. 2, 1997, pp. 211-248. doi : 10.1086 / 262072 .
  13. ^ Carl Shapiro, Stiglitz, Joseph: Equilibrium unemployment as a worker discipline device . In: The American Economic Review, Vol. 74, No. 3 (Ed.): Quarterly Journal of Economics . 74, No. 3, 1984, pp. 433-444. JSTOR 1804018 1804018 .
  14. Olivier Blanchard, Jordi Galí: A New Keynesian model with unemployment . In: Center for Financial Studies, Goethe University, Frankfurt (Ed.): CFS working paper 2007/08 . 2007.