What it Means to Be a New Keynesian Economist

Abstract

During the decade ‘80s economic policies began to be pursued that were in line with New Classical and particularly Monetarist theory both in the USA and Europe by conservative governments that had come to power. It was based on the assumption that the economy would automatically come to full-employment equilibrium, or using the concept first introduced by Friedman, at the point of natural rate of unemployment (nru). To achieve price stability along with automatic natural-rate-of-unemployment equilibrium, therefore, Keynesian policies of raising aggregate demand, including monetary expansion had to be discarded, and Monetarist tight money policy implemented instead. But the proposition of automatic natural-rate-of-unemployment equilibrium claimed by both New Classicals and Monetarists did not materialize; unemployment persisted and even increased during the ‘80s. The failure of New Classical and Monetarist policies made Keynesianism mainstream once again in the academic circles and this movement was called “Counter Counter-Revolution” (Blinder 1988, Mankiw, 1990).

The New Keynesians, who accepted the Keynesian unemployment (un-N) proposition and also accepted the criticism of the New Classicals that Keynesian macroeconomics lacked microeconomic foundations, tried to lay down the micro foundations for Keynes, but not by accepting perfect competition and Walrasian equilibrium but by pointing out to diverse reasons of “imperfect competition”, “inflexibility of wages and prices” and “lack of coordination between markets”. The pioneers of the New Keynesian Economics which emerged in the USA in the beginning of ‘80s are Alan S. Blinder, N. Gregory Mankiw, John Taylor, and David Romer.