New Keynesian EconomicsEdit

Def: A school of thought in economics which incorporates primarily the work of Keynes' students in the Old Keynesians school of thought along with some insights from New Classical Economics. This school was a reaction to the writtings of economists calling into question several of the assumptions and theories of the students of John Maynard Keynes. In the Mankiw article, linked below, there are several categories listed:

  • Menu Costs -- there are costs to changing prices, negotiation, listing new pices on menus or catalogs. People have Nominal Price Rigidity.
  • Aggregate Demand Externalities -- "This macroeconomic impact of one firm's price adjustment on the demand for all other firms' products is called an 'aggregate-demand externality.' "
  • Staggered Prices -- an explanation of the slow adjustment of prices
  • Coordination Failure -- because of incomplete information firms will not be able to act in concert to avoid altering, adversely, the effect of their actions on other firms
  • Efficiency Wage -- markets do not clear and there is unemployment because of the need to pay workers a higher wage than what would make them indifferent between taking the job and not.

  1. “During some periods – often extended – an excess supply of labor exists at the prevailing level of Real Wages (and expectations concerning future wages and prices).”
  2. “The aggregate level of economic activity fluctuates markedly, whether measured by capacity utilization, GDP, or unemployment. These fluctuations are greater in magnitude and different in pattern from any that might be accounted for by short-run changes in technology, tastes, or demography.”
  3. “Money matters, at least most of the time, although monetary policy may be ineffective in some periods (like the Great Depression).” (Greenwald and Stiglitz 1993 p. 23)

“…New Keynesians… believe that the labor market and the other markets essentially always clear, with wages and prices adjusting quickly to disturbances; that shifts in the demand or supply curves for labor can explain fluctuations in observed levels of employment; and that the economy’s (presumably efficient) responses to shocks can explain these fluctuations in output. In the case of real business cycles, the focus is on shocks to technology; for many new classical theories, the focus is shocks to the money supply.” (Greenwald and Stiglitz 1993 p. 23)

“The new Keynesian view that emphasizes price flexibility suggests an alternate and more complex perspective: first, that natural economic forces can magnify economic shocks that may seem small, and second that existing price rigidities may ‘’reduce’’ the magnitude of the fluctuations, as Keynes argued. Since even with perfectly flexible wages and prices, the economy could experience substantial variations in employment, they believe the single-minded focus on price and wage rigidities is misguided. And since small disturbances can give rise to large effects, there is less concern about identifying the source of the disturbance…” (Greenwald and Stiglitz 1993 p. 25)

Macroeconomic schools of thought
Austrian EconomicsClassical EconomistsKeynesian economicsMarxismMercantilismMonetarismNew ClassicalsNew KeynesiansNeoclassicalNeoclassical SynthesisNeo-KeynesianPhysiocracyPost-Keynesian economicsSupply-side economics

Students of this school:Edit

  • Mankiw, Greg
  • Akerlof & Yellen
  • Ball & Romer
  • Blanchard & Kiyotaki
  • Rotemberg[1]


James Tobin The Journal of Economic Perspectives, Vol. 7, No. 1. (Winter, 1993), pp. 45-65.

Stable URL
  • Greenwald, Bruce and Joseph Stiglitz: “New and Old Keynesians” ‘’The Journal of Economic Perspectives’’ Vol. 7, No. 1. (Winter, 1993), pp. 23-44

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