In this online book, we have presented a macroeconomic model for the short-run developed in the new Keynesian tradition. By modifying few basic assumptions, we have obtained a similar model with substantially different macroeconomic policy implications. In the standard version of the new Keynesian or new consensus model, interest rate policy of the central bank controls the cyclical movements of aggregate demand in the short-run while supply-side oriented policies influence the economy in the long-run. This means that economic policy aimed at the management of aggregate demand in the short-run cannot be used to increase potential output and employment in the long-run. The model-inherent trade-off between a constant inflation rate and an unemployment rate that deviates from the NAIRU build the foundations of the policy program of the new Keynesian model. We have shown that such an approach reaches its limits during phases of economic recessions when for example investment becomes inelastic to interest rates or when the nominal interest rate reaches the zero lower bound. Moreover, this approach fails to account for important interest cost effects that call into question the postulated long-run neutrality of monetary policy with respect to distribution and employment.
We have modified the new Keynesian model following some post-Keynesian intuitions. The modified model framework gave space to a much more important role for aggregate demand management both in the short and in the long-run where fiscal policy gained a prominent role. Low interest rate policy on the one hand, and the coordination of wage policy to stabilise unit labour cost growth and the inflation rate on the other hand, can increase the inflation-stable level of employment and reduce the NAIRU, providing space for demand management through fiscal policy.
We have attempted to shown that the new Keynesian and the post-Keynesian approach can be represented in a unified model framework where different economic policy recommendations result from different modeling assumptions. Our approach made clear that few changes to the new Keynesian model allows for the transition to a post-Keynesian inspired economic policy scenario, at least in the short-run. This led us to conclude that a convergence of the basic economic policy view of new Keynesian and of the post-Keynesian school of thought cannot be excluded.48
Important methodological differences between the two economic paradigms remain of course but they were not the object of our treatment.↩︎