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New classical macroeconomics

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I don't think that [monopolistic behavior] is crucial to business cycles.
~ Robert Lucas, Jr.

New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.

CONTENT : A - F , G - L , M - R , S - Z , See also , External links

Quotes

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Quotes are arranged alphabetically by author

A - F

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  • Allegedly, it is the mathematical elegance of the New-Classical economists that accounts for their widespread appeal to the mainstream of technically trained young economists.  This observation is entirely correct but ironic.  The cult of admiration for mathematically elegant economic models is the product of the so-called Keynesian revolution.  Rivals to Keynesian orthodoxy had always been scoffed at because they lacked such mathematical rigor.  It seems that Orthodox Keynesianism has died upon the sword by which it once lived.  To Austrian economists, of course, the irony is hardly comforting: the Rational-Expectations/New-Classical school may have beaten the Orthodox Keynesians at their own game, but the game was not worth playing.  Moreover, the game itself distracts from the serious task of building an understanding of economic events.
  • Some of the new classical economists are extremely ideological. If you give them evidence, for example, that fully anticipated money matters, evidence counter to their world view, they say that you're wrong. And if you say that their evidence is wrong, they'll say you're wrong again. I give up! Barro once said to me that there isn't any evidence in the world that fiscal policy is effective. Just open your eyes and see episodes of tax cutting and government-spending increases. How about World War II? That had big effects on real output. His response? ... He sometimes shrugs, he sometimes gives a clearer alternative explanation.
    Sargent is much more serious. He doesn't come to these economic views from a rigidly maintained ideological position. He's a sort of tinkerer, playing an intellectual game. He looks at a puzzle to see if he can solve it in a particular way, exercising these fancy techniques. That's his thing, so to speak.
    I think Lucas is a blend of those two, actually. He's not extreme as Barro, he's more open. And he's not quite as technical as Sargent.
  • For a period of roughly 35 years, Keynesian theory provided a central paradigm for macroeconomists, and considerable progress was made on several empirical fronts. It was widely recognized that some of the ingredients of Keynesian economics (e.g. money illusion and/or nominal wage rigidity) rested on slender to non-existent microtheoretic foundations; and there were always dissenters. But, thought of as a collection of empirical regularities that fit together into a coherent whole, the theory worked tolerably well. In the 1970s, however, the Keynesian paradigm was rejected by a great many academic economists, especially in the United States, in favour of what we now call new classical economics. By about 1980, it was hard to find an American academic macroeconomist under the age of 40 who professed to be a Keynesian. That was an astonishing intellectual turnabout in less than a decade, an intellectual revolution for sure.
    • Alan S. Blinder, "The fall and rise of Keynesian economics", Economic Record (1988).

G - L

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  • Since the late 1960s macroeconomic debates in the United States have centered on the competing interpretations of the new classical and new Keynesian macroeconomics. The initial new classical model developed in the early 1970s by Robert E. Lucas, Jr., combined market-clearing, imperfect information, and rational expectations. After much testing, it was eventually rejected in the late 1970s for failing to explain why business cycles lasted on average four years while information delays lasted only a few weeks. It was soon replaced by a second new classical approach, the Real Business Cycle (RBC) model, which was also based on continuous market clearing and competitive equilibrium, but now generated the business cycle through serially correlated procyclical technology shocks.
    • Robert J. Gordon, “Are Procyclical Productivity Fluctuations a Figment of Measurement Error?” (1992).
[A] modern-day disciple of Keynes recently conceded that "mainstream macroeconomics remains conflicted about the reintroduction of Say's Law" ..., a statement that indirectly seems to concede that the New Classicals ... have had an impact that is displeasing to those who, like the aforementioned anonymous referee, would prefer to throw Say's Law down George Orwell's knowledge-eradicating "memory hole" (from 1984).
~ Frank M. Machovec
  • I don't think that [monopolistic behavior] is crucial to business cycles. I'll give you an example: In a competitive model, prices are never a decision variable; they're always parameters in people's decision problems. When you're informally telling these rational expectations stories, thought, it's much more natural to think of prices being a decision variable. So somebody sets a price, and then inventories or sales give them the signal as to what's happening to demand. You put some goods on the shelf at a particular price, and if demand is high you hear about that because you sell a lot more at that price than you expected to. So it would be nice to write down formal models in which price is a decision variable.

M - R

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  • An anonymous referee for another journal severely criticized my inclusion of Say's Law as a key explanatory component of the macroeconomic problem as currently understood.  He/she characterized Say's Law as a "worthless piece of economic dogma," adding that "the only way in which Say's Law has shaped the corpus of macro theory is by being comprehensively rejected by Keynes and everyone else to come since."  Nevertheless, a modern-day disciple of Keynes recently conceded that "mainstream macroeconomics remains conflicted about the reintroduction of Say's Law" (Lance Taylor, in Epstein, p. 540), a statement that indirectly seems to concede that the New Classicals (Barro, Lucas, Sargent, etc.) have had an impact that is displeasing to those who, like the aforementioned anonymous referee, would prefer to throw Say's Law down George Orwell's knowledge-eradicating "memory hole" (from 1984).

S - Z

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  • You could say that [new classical revolution] is as much a revolution against old monetarism as it is against Keynesianism. The disagreement between monetarists and Keynesians was about the value of some parameters. It is not as fundamental a split as we experience now.
  • Rational expectations by itself seems to me separable from the assumption of price-cleared markets. It could be used in a model in which quantity adjustments were helping to equate supply and demand. Lucas himself says that he adopts the market clearing assumption because it is convenient, not because it is realistic. [...] The new classicals will also say that if you observe long-term contracts, which on the surface seem to depart from market clearing prices, you can simply reinterpret what market clearing prices are. You reinterpret the demand and supply functions under the constraint of the contracts. But then, they are not able to maintain the strong propositions that they were able to derive from their other models, notably about policy-ineffectiveness.
  • The New Classicists are my particular bugabear.  They are always telling us that we must suppose that markets are always clearing, that we've got to interpret the business cycle as if markets are always clearing, that we've got to see unemployment as voluntary withholding of labor from the market.  But this notion that all markets are clearing, or are close enough to clearing so that we are required to do our reasoning as if they were clearing, has no more merit than a methodology which hardly gets explicitly discussed.  …  [I]f we are doing macroeconomics—which is concerned with lapses from full coordination, and what accounts for the greater or lesser degree of full coordination in the economy—then these transitional obstacles are the center of the topic.  What might be merely a fringe complication set aside in a micro analysis are moved to the very center when we are doing macroeconomics.  Yet New Classical economists dismisses all concerns with lapses of coordination and the failure of market so clear completely.  It simply wipes away the problem.
  • [New classical economics] was the starting point for a rightward shift in economics that went against the idea that monetary policy can improve macroeconomic outcomes.
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