Theoretical Developments in the Light of Macroeconomic Policy and Empirical Research, Issue 2757
The paper surveys the macroeconomic literature of the last decade with emphasis on the implications of the New Classical and Rational Expectations critiques for the Keynesian paradigm and the role of macro policies. This is done on the background of the main macro developments of the l970'a and 1980's as well as the specific lessons of recent high (chronic) inflation processes. The paper takes an eclectic view emphasizing a synthesis that is emerging in which the basic Keynesian view of the existence of market and price co-ordination failures as well as room for Pareto improving policy intervention are maintained. At the same time the theoretical underpinnings are undergoing substantial change mainly due to a 'rational expectations' (rather than 'new classical') reformulation. The new Theory of Economic Policy is also discussed and illustrated in terms of recent stabilization experience.
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aggregate demand aggregate price aggregate supply applied assume attack behaviour Blanchard classical closed economy COLA agreements competitive context contract length countries credibility deficits demand for money devaluation discussion dynamic inconsistency eclectic econometric EMPIRICAL RESEARCH equilibrium example exchange rate fiscal given in Bruno high inflation process hyperinflation important increase inertia inflation rate intuition Keynesian labour markets LIGHT OF MACROECONOMIC literature Lucas Lucas critique macro policy MACROECONOMIC POLICY macroeconomic theory major market clearing Michael Bruno monetary accomodation monetary policy monthly rate Nash equilibrium nominal rigidities nominal wage open economy optimal outcome output paper paradigm Pareto percent period persistent unemployment Phillips curve POLICY AND EMPIRICAL policy implications policy rule precommitment price adjustment equation price equation price level private sector rate of inflation rational expectations real wage rigidity relevant role rules versus discretion Sargent Section seignorage shift substitutes supply shocks synthesis THEORETICAL DEVELOPMENTS trade-off union wage and price wage inflation zero inflation