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Monday, July 30, 2012

What is the Heart of New Keynesian Economics.

I knew I shouldn't read this post by Simon Wren-Lewis but I did. I also refer to this post.

I comment.

I fear I disagree. I haven't read Keynesian Economics and The Economics of Keynes, so I should just be silent. But I think that Leijonhufvud is a new Keynesian in the same way Prescott is. Nominal rigidities are important to New Keynesian analysis and Prescott absolutely rejects the idea that they are relevant to the study of the economy. Rational intertemporal maximization by a representative agent is central to new Keynesian analysis (recall you called it the heart of modern macro) and Leijonhufvud (in seminars and over dinner) absolutely rejects the idea that it is relevant to the study of the economy.

There is more than one approach to understanding how the real interest rate is wrong. New Keynesian analysis dismisses irrational bubbles (its "heart" is rational intertemporal utility maximization).

I think your logic is that Leijonhufvud clearly disagrees with Prescott so he must agree with you. This does not follow.

1 comment:

Mainly Macro said...

Nice! My rule number one in writing posts, which I disregarded in this case in my original response to a comment, is beware of making off the cuff remarks that sound good at the time but are not really your main point. Perhaps my rule number two should be not to try and then defend the same remarks!

In my defense of that defense, I did say explicitly in my post that I knew Leijonhufvud disagreed with much that is part of NK economics. What I wanted to say was that perhaps one of his points had to some extent been taken up in NK economics, when at least compared to old Keynesian economics. But if he just meant that people can hold irrational expectations about real interest rates, then your point is a good one.

However I wrote the post because I wanted to say something about NK economics relative to old Keynesian ideas. I hope you agree that comparing systems of thought is more interesting than trying to stick labels on people.