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- Title
The New Keynesian Economics and the Output-Inflation Trade-off.
- Authors
Ball, Laurence; Mankiw, N. Gregory; Romer, David
- Abstract
The article focuses on the new Keynesian economics and the output-inflation trade-off. In the early 1980s, the Keynesian view of business cycles was in trouble. The problem was not new empirical evidence against Keynesian theories, but weakness in the theories themselves. According to the Keynesian view, fluctuations in output arise largely from fluctuations in nominal aggregate demand. These changes in demand have real effects because nominal wages and prices are rigid. But in Keynesian models of the 1970s, the crucial nominal rigidities were assumed rather than explained-assumed directly, as in disequilibrium models, or introduced through theoretically arbitrary assumptions about labor contracts. Indeed, it was clearly in the interests of agents to eliminate the rigidities they were assumed to create. Thus the 1970s and early 1980s saw many economists turn away from Keynesian theories and toward new classical models with flexible wages and prices. But Keynesian economics has made much progress in the past few years. Recent research has produced models in which optimizing agents choose to create nominal rigidities.
- Subjects
KEYNESIAN economics; PRICE inflation; PRODUCTION (Economic theory); BUSINESS cycles; WAGES; LABOR contracts
- Publication
Brookings Papers on Economic Activity, 1988, Issue 1, p1
- ISSN
0007-2303
- Publication type
Article
- DOI
10.2307/2534424