The state of New Keynesian economics: A Partial Assessment

Jordi Galí reviews the research around New Keynesian economics.

He says it still remains robust:

In August 2007, when the first signs emerged of what would come to be the most damaging global financial crisis since the Great Depression, the New Keynesian paradigm was dominant in macroeconomics. It was taught in economics programs all over the world as the framework of reference for understanding fluctuations in economic activity and inflation and their relation to monetary and fiscal policies. It was widely adopted by researchers as a baseline model that could be used flexibly to analyze a variety of macroeconomic phenomena. The New Keynesian model was also at the
core of the medium-scale dynamic, stochastic, general equilibrium (DSGE) models developed and used by central banks and policy institutions throughout the world.

Ten years later, tons of ammunition has been fired against modern macroeconomics in general, and against dynamic stochastic general equilibrium models that build on the New Keynesian framework in particular. The criticisms have focused on the failure of these models to predict the crisis, a weakness often attributed to their lack of a financial block that could account for the key factors behind the crisis, whose origin was largely

Other aspects of the New Keynesian model and its extensions that have been the target of criticism include the assumptions of rational expectations, perfect
information, and an infinitely-lived representative household.

Those criticisms notwithstanding, the New Keynesian model arguably remains the dominant framework in the classroom, in academic research, and in policy modeling. In fact, one can argue that over the past ten years the scope of New Keynesian economics has kept widening, by encompassing a growing number of phenomena that are analyzed using its basic framework, as well as by addressing some of the criticisms raised against
it. Much recent research, for instance, has been devoted to extending the basic model to incorporate financial frictions in the basic the model, as described in Gertler and Gilchrist (2018) in their contribution to the present symposium. In addition, the New Keynesian model has been the framework of choice in much of the work aimed at evaluating alternative proposals to stimulate the economy in the face of the unusual circumstances triggered by the crisis, including the use of fiscal policy and unconventional monetary policies.2

The present paper takes stock of the state of New Keynesian economics by reviewing some of its main insights and by providing an overview of some recent developments.

It is a decent primer on New Keyensian macroeconomics…


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