Transcript Macro Spectrum

Spectrum of Macroeconomic Thought
Marx
Keynes
PostKeynesian
Friedman
Keynesian
(hydraulic
Keynesians)
Lucas
Monetarist
New
Classical
Rat-X
New Keynesian
- New Monetarist(?)
Markets
Clear in
Short-Run
micro
foundations
Uncertainty
Sticky
Wages/Prices
Disequilibrium
Policy
Works
Markets
Clear
In
Long-run
Policy
Ineffectiveness
Austrian
Radical
Political
Economy
Kalecki
New Classicals in Their Own Words
• Lucas critique: …modern macroeconomic models are of no value in
guiding policy … For purposes of conditional forecasting (what will happen
conditional on some action), one needs to know the structural parameters.
(But) a change in policy necessarily alters some parameters (for example,
those describing the past behavior of the policy variables themselves.
• … expectations about future prices, tax rates, and income levels play a
critical role in many demand and supply schedules in those
(macroeconometric) models. [I]nvestment demand typically is supposed to
respond to businessmen’s expectations of future tax credits, tax rates, and
factor costs. The supply of labor, …, to the rate of inflation workers expect in
the future. Such structural equations are usually identified by the
assumption that the expectation about the factor price or rate of inflation is a
function only of a few lagged values of the variable itself…However, the
macro models themselves contain complicated dynamic interactions among
endogenous variables, including factor prices and the rate of inflation.
• The casual treatment of expectations is not a peripheral problem in these
models, for the role of expectations is pervasive and exerts a massive
influence on their dynamic properties (a point Keynes himself insisted on).
• “The Failure of Keynesian Economics”
Equilibrium Business Cycle Theory
• Perhaps the most important failure of the classical model (was) its inability to
explain the positive correlation between prices and/or wages and aggregate
output or employment …contrary to the classical “neutrality” propositions.
• Policy ineffectiveness hypothesis: A distinguishing feature of the
equilibrium macroeconometric models is that predicatable changes in the
money supply do not affect real GNP or total employment.
• The new classical models continue to assume that markets always
clear and that agents optimize.
• A New Classical Story: Because they do not have all the information that
would enable them to compute perfectly the relative prices they care about,
agents make errors…[A]gents temporarily mistake a general increase in all
absolute prices as an increase in the relative price of the good they are
selling, leading them to increase their supply of that good…Since everyone
is, on average, making the same mistake, aggregate output will rise…
• While such a theory predicts positive correlations between the inflation rate
or money supply and the level of output, it also asserts that those
correlations do not depict “tradeoffs” that can be exploited by a policy
authority…There is no way the monetary authority can follow a systematic
activist policy and achieve a rate of output (above the “natural” rate).