The ‘modern’ view of macroeconomics: some critical reflections

Alfonso Palacio Vera

56 citations0/0 files storedCambridge Journal of Economics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

David Romer has proposed a new basic macroeconomic framework: the IS--MP--IA model. Its proponents claim that it represents the 'modern' view of macroeconomics. We show that the new framework remains closely attached to the neoclassical synthesis and, in addition, does not take account of: (i) the empirical evidence on the output--inflation trade-off; (ii) the evidence on the interdependence of aggregate demand and supply; (iii) the institutional limits of monetary policy; and (iv) the implications for macroeconomic policy of (i), (ii) and (iii). Once these aspects have been incorporated, short-run stabilisation policy is not neutral in the long run, the notion of a 'natural' rate of interest becomes untenable and aggregate demand turns into the crucial exogenous variable. Copyright 2005, Oxford University Press.

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References

1936The General Theory of Employment, Interest and Money.1993Discretion versus policy rules in practice 1936The General Theory of Employment, Interest and Money, by John Maynard Keynes 1937The General Theory of Employment 1999The Science of Monetary Policy: A New Keynesian Perspective 1992Unemployment: macroeconomic performance and the labour market 1998It's Baaack: Japan's Slump and the Return of the Liquidity Trap 1999Monetary Policy Rules

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