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Hans-michael Trautwein - One of the best experts on this subject based on the ideXlab platform.
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Wicksell, Keynes, and the New Neoclassical Synthesis: What Can We Learn for Monetary Policy?
Economic Notes, 2014Co-Authors: Roberto Tamborini, Hans-michael Trautwein, Ronny MazzocchiAbstract:The New Neoclassical Synthesis (NNS) provides the established macroeconomic foundation for monetary policy. The Great Recession has, however, unveiled a numberof unresolved issues. Prominent scholars have stressed the connections of the NNS with the founders of macroeconomic thought, Wicksell and Keynes. Our main contention is that the NNS fails to consider, and learn from, the hallmark of Wicksell’s and Keynes’s approaches to business cycles, namely investment–saving imbalances (ISI). Systematic studies of macroeconomic instability, and notably the Great Recession, give prominence to this phenomenon. Drawing on Wicksell’s and Keynes’s insights, this paper provides a framework to deal with ISI and monetary policy according to modern theoretical standards and techniques (e.g. agents seek to optimize intertemporally and markets clear). Section 2 of the paper clarifies some basictheoretical issues underlyingtheNNSvis‐a‐visWicksell andKeynes. Section 3 presents a dynamic model whereby it is possible to assess some basic issues concerning the macroeconomics of ISI that are at variance withtheNNS.Section4showshowsystemstabilizationcanbeachievedby means of a ‘Wicksellian’ interest‐rate rule, which, however, displays dynamic features and conditions that differ from the current NNS consensus. Central banks may thus learn that ISI deserve careful symptom monitoring, andthatthey requiregreater attention tothe dynamic stability of choices of policy reaction functions. (J.E.L.: E20, E30, E53).
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Three macroeconomic syntheses of vintage 1937: Hicks, Haberler, and Lundberg
The European Journal of the History of Economic Thought, 2014Co-Authors: Hans-michael TrautweinAbstract:AbstractThe 1920s and 1930s were years of intensive debate about economic dynamics and stabilisation policies. There was a large variety of explanations of cycles and depressions, and Keynes’ General Theory of Employment, Interest and Money (1936) was pitched against them. In 1937, followed three different attempts to provide synthetic expositions of macroeconomic theory that would deal with the Keynesian challenge: Hicks’ Mr. Keynes and the “Classics”, Haberler's Prosperity and Depression, and Lundberg's Studies in the Theory of Economic Expansion. This paper compares those 1937 syntheses and contrasts them with the “Neoclassical Synthesis” and the current “New Neoclassical Synthesis”.
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Wicksell after Woodford
Journal of the History of Economic Thought, 2006Co-Authors: Mauro Boianovsky, Hans-michael TrautweinAbstract:The New Neoclassical Synthesis that Michael Woodford puts forward in his Interest and Prices (2003) is primarily a Synthesis of New Classical and New Keynesian ideas. Yet Woodford presents it as an...
Rafael Wouters - One of the best experts on this subject based on the ideXlab platform.
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Bayesian New Neoclassical Synthesis (Nns) Models: Modern Tools for Central Banks
Journal of the European Economic Association, 2005Co-Authors: Frank Smets, Rafael WoutersAbstract:This paper discusses the advantages of Bayesian New Neoclassical Synthesis models as tools for monetary policy analysis and forecasting. The combination of a sound, micro founded structure with a good probabilistic description of the observed data makes those models suitable for investigating the structural sources of business cycle fluctuations, for analysing optimal monetary policy responses to those developments and for making economic projections conditional on various policy assumptions. The paper gives two examples of such analysis
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Bayesian New Neoclassical Synthesis (NNS) Models: Modern Tools for Central Banks
Journal of the European Economic Association, 2005Co-Authors: Frank Smets, Rafael WoutersAbstract:This paper discusses the advantages of Bayesian New Neoclassical Synthesis models as tools for monetary policy analysis and forecasting. The combination of a sound, micro founded structure with a good probabilistic description of the observed data makes those models suitable for investigating the structural sources of business cycle fluctuations, for analysing optimal monetary policy responses to those developments and for making economic projections conditional on various policy assumptions. The paper gives two examples of such analysis. (JEL: E40, E50, C11) Copyright (c) 2005 The European Economic Association.
Goulven Rubin - One of the best experts on this subject based on the ideXlab platform.
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Robert Solow’s Non-Walrasian Conception of Economics
History of Political Economy, 2020Co-Authors: Matthieu Ballandonne, Goulven RubinAbstract:The Neoclassical Synthesis has been defined as a bridge between Keynes-ian theory and Walrasian general equilibrium theory. The aim of this article is to show that founders of the Neoclassical Synthesis were not homogenous in their appraisal of the importance of Walrasian theory. To do so, we focus on Robert Solow’s contributions as a case study and examine the history of his lifelong criticism of what he called “axiomatics.” According to Solow, the axiomatic approach aims at founding economics on one general and complex model based on first principles or axioms. In contrast, Solow advocated the use of a diversity of simple and partial models, which have practical utility, are realistic in their crucial assumptions, consider institutions and the evolving nature of the economy, and rely on common sense microfoundations. We conclude by suggesting that Solow can be characterized as Cournotian.
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Robert Solow's Non-Walrasian Conception of Economics
SSRN Electronic Journal, 2017Co-Authors: Matthieu Ballandonne, Goulven RubinAbstract:The Neoclassical Synthesis has been defined as a bridge between Keynesian theory and Walrasian general equilibrium theory. The aim of this article is to show that founders of the Neoclassical Synthesis were not homogenous in their appraisal of the importance of Walrasian theory. To do so, we focus on Robert Solow’s contributions as a case study and examine the history of his lifelong criticism of what he called “axiomatics.” According to Solow, the axiomatic approach aims at founding economics on one general and complex model based on first principles or axioms. In contrast, Solow advocated the use of a diversity of simple and partial models, which have practical utility, are realistic in their crucial assumptions, consider institutions and the evolving nature of the economy, and rely on common sense microfoundations. We conclude by suggesting that Solow can be characterized as Cournotian.
Robert G King - One of the best experts on this subject based on the ideXlab platform.
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the new Neoclassical Synthesis and the role of monetary policy
Nber Macroeconomics Annual, 1997Co-Authors: Marvin Goodfriend, Robert G KingAbstract:Macroeconomics is moving toward a New Neoclassical Synthesis, which like the Synthesis of the 1960s melds Classical with Keynesian ideas. This paper describes the key features of the new Synthesis and its implications for the role of monetary policy. We find that the New Neoclassical Synthesis rationalizes an activist monetary policy which is a simple system of inflation targets. Under this "neutral" monetary policy, real quantities evolve as suggested in the literature on real business cycles. Going beyond broad principles, we use the new Synthesis to address several operational aspects of inflation targeting. These include its practicality, the response to oil shocks, the choice of price index, the design of a mandate, and the tactics of interest rate policy.
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The New Neoclassical Synthesis and the Role of Monetary Policy
SSRN Electronic Journal, 1997Co-Authors: Marvin Goodfriend, Robert G KingAbstract:Macroeconomics is moving toward a New Neoclassical Synthesis, which like the Synthesis of the 1960s melds Classical with Keynesian ideas. This paper describes the key features of the new Synthesis and its implications for the role of monetary policy. We find that the New Neoclassical Synthesis rationalizes an activist monetary policy which is a simply system of inflation targets. Under this "neutral" monetary policy, real quantities evolve as suggested in the literature on real business cycles. Going beyond broad principles, we use the new Synthesis to address several operational aspects of inflation targeting. These include its practicality, the response to oil shocks, the choice of price index, the design of a mandate, and the tactics of interest rate policy.
Marvin Goodfriend - One of the best experts on this subject based on the ideXlab platform.
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The Case for Price Stability with a Flexible Exchange Rate in the New Neoclassical Synthesis
Cato Journal, 2008Co-Authors: Marvin GoodfriendAbstract:The New Neoclassical Synthesis is a natural starting point for the consideration of welfare-maximizing monetary arrangements in the international context. Alternatively known as the New Keynesian model, this consensus model of monetary policy deserves our attention because it embodies cumulative advances in theory and policy informed by decades of monetary experience from around the world. The consensus model with its prescription for price stability serves today as the foundation for thinking about monetary policy at central banks and universities worldwide. (1) The purpose of the article is to review the fundamental principles of monetary policy in terms of the New Synthesis. The first section describes briefly the structure of the baseline NNS model. The second section presents the ease for price stability in the NNS model. The third section extends the discussion to the open economy and presents the NNS case for a flexible exchange rate. The fourth section tells why monetary policy is fragile that simultaneously attempts to fix the foreign exchange rate and pursue interest rate policy to sustain price stability. The New Neoclassical Synthesis The convergence of thinking embodied in the modern consensus model of monetary policy is reflected in the fact that it goes by two names--the New Neoclassical Synthesis and the New Keynesian model. The NNS framework inherits intertemporal optimization, rational expectations, and a real business cycle (RBC) core from the classical side, and monopolistic competition, nominal price rigidities, and a prominent role for monetary stabilization policy from the Keynesian side. Both classical and Keynesian contributions are compatible in the NNS framework because of its microeconomic foundations. The baseline NNS model is built up from household intertemporal utility maximization and firm profit maximization. (2) In the NNS model, representative households maximize utility by choosing life-time consumption, and how much work effort to supply each period to firms which produce the consumption goods. Monopolistically competitive firms produce differentiated consumption goods, exercise market power, and maximize profits by pricing their differentiated products at a markup over marginal production costs. Firms are owned by households, which earn both wage and profit income. Households have access to a credit market where they can borrow or lend. Households take product prices, the red wage in the labor market, and the real interest rate in the credit market as given in making their choices. Firms take wages as given when choosing how much work effort to hire in the labor market. A firm incurs decision costs to determine the relative price that maximizes its profits. Pricing decisions must be overseen by management. Pressing problems compete for scarce management time. Hence, pricing gets management's attention on a stochastic basis depending on its perceived urgency relative to other pressing concerns. The NNS model puts the markup at the core of the pricing decision. According to the model, a firm considers changing its nominal product price only when demand or cost conditions are expected to move its actual markup significantly and persistently away from its flexible-price profit-maximizing markup. For instance, a firm would raise its nominal product price if higher nominal wage growth or lower productivity growth threatened to compress its actual markup relative to its flexible-price profit-maximizing markup. On the other hand, a firm would consider lowering its nominal product price if lower nominal wage growth or higher productivity growth threatened to elevate its actual markup relative to its flexible-price profit-maximizing markup. The Case for Price Stability The case for price stability; in the NNS model is as follows. (3) An environment in which the price level is stable must be one in which actual markups equal flexible-price profit maximizing markups. …
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International Adjustment in the New Neoclassical Synthesis
2007Co-Authors: Marvin GoodfriendAbstract:This paper applies principles of the New Neoclassical Synthesis (NNS) to questions of international trade and financial adjustment. The analytical framework is a 2-country, 2-good, 2-period model designed to explore the behavior of the balance of payments, the terms of trade, and aggregate fluctuations in terms of interest rate and exchange rate policies practiced by the world's most important central banks.1 In keeping with NNS principles, the analysis begins by specifying a flexible-price International Real Business Cycle (IRBC) model in which aggregate fluctuations are entirely real in nature and there is no role for monetary stabilization policy. The IRBC model serves as the core of an International New Neoclassical Synthesis (INNS) model which includes money prices and wages, a nominal exchange rate, nominal interest rates, and costly price adjustment. Frictions associated with the use of money have two important consequences. First, monetary frictions expose the INNS economy to inefficient aggregate fluctuations relative to the IRBC core. Second, monetary frictions provide the leverage for interest rate policy to influence real aggregate variables. The New Neoclassical Synthesis provides strategic and tactical direction for interest rate policy, recommending the adoption of a flexible exchange rate to enable each country to target domestic inflation independently to make the INNS economy behave like its IRBC core. In practice, monetary policy frictions associated with modeling, forecasting, and measurement inevitably produce inefficient outcomes relative to the IRBC core. The paper explores inefficiencies that occur because interest rate policy doesn't act flawlessly and those that occur because a country fixes its exchange rate, or because of credibility crises that manifest themselves as "inflation scares" in a flexible exchange rate regime or as "devaluation scares" in a fixed exchange rate regime.
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Monetary Policy in the New Neoclassical Synthesis: A Primer
International Finance, 2002Co-Authors: Marvin GoodfriendAbstract:This primer provides an understanding of the mechanics and objectives of monetary policy using a benchmark new Neoclassical Synthesis (NNS) macromodel. The NNS model incorporates classical features such as a real business cycle (RBC) core and Keynesian features such as monopolistically competitive firms and costly price adjustment. Price stability maximizes welfare in the benchmark NNS model because it keeps output at its potential, defined as the outcome of an imperfectly competitive RBC model with a constant mark–up of price over marginal cost.
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the new Neoclassical Synthesis and the role of monetary policy
Nber Macroeconomics Annual, 1997Co-Authors: Marvin Goodfriend, Robert G KingAbstract:Macroeconomics is moving toward a New Neoclassical Synthesis, which like the Synthesis of the 1960s melds Classical with Keynesian ideas. This paper describes the key features of the new Synthesis and its implications for the role of monetary policy. We find that the New Neoclassical Synthesis rationalizes an activist monetary policy which is a simple system of inflation targets. Under this "neutral" monetary policy, real quantities evolve as suggested in the literature on real business cycles. Going beyond broad principles, we use the new Synthesis to address several operational aspects of inflation targeting. These include its practicality, the response to oil shocks, the choice of price index, the design of a mandate, and the tactics of interest rate policy.
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The New Neoclassical Synthesis and the Role of Monetary Policy
SSRN Electronic Journal, 1997Co-Authors: Marvin Goodfriend, Robert G KingAbstract:Macroeconomics is moving toward a New Neoclassical Synthesis, which like the Synthesis of the 1960s melds Classical with Keynesian ideas. This paper describes the key features of the new Synthesis and its implications for the role of monetary policy. We find that the New Neoclassical Synthesis rationalizes an activist monetary policy which is a simply system of inflation targets. Under this "neutral" monetary policy, real quantities evolve as suggested in the literature on real business cycles. Going beyond broad principles, we use the new Synthesis to address several operational aspects of inflation targeting. These include its practicality, the response to oil shocks, the choice of price index, the design of a mandate, and the tactics of interest rate policy.
