Macroeconomics in the 20th Century, progress.pptVIP

Macroeconomics in the 20th Century, progress?Georgia Bush“In the long run we are all dead” “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm passes the ocean is flat again.” Prepared for Rutgers Economics Department Macro Study group April 7, 2009 Outline: The Great Depression → Macroeconomics Neo-classical-Keynesian Synthesis The Great Inflation → Classical critique New-Keynesian rebuttal Where are we now A Baseline New Keynesian Model Progress? The Great Depression → Macroeconomics Macroeconomics as a term first appeared in the 1940s (Lawrence Klein) Precursors Mostly single market models, supply and demand 1940s = Post Depression Key questions pertained to the extreme economic environment: In 1933 US unemployment 25%, real GDP 31% below 1929 level Revolutionary of the day: John Maynard Keynes The General Theory (1936) IS-LM model (Hicks, 1937); dynamics of general equilibrium made user-friendly Simplification but highly popular Large applied econometrics models (Klein, Eckstein, Ando and Modigliani) By the 1960s, many competing models built for policy analysis and forecasting Keynesian content and practice Keynes’ innovations: simultaneous determination de-emphasized business cycle dynamics focused on cross-market influences determination of a set of key variables simultaneously: Stabilization policy required and effective Ramifications of Keynesian theory: For government Greater responsibility for macroeconomic management Tools now available to analyze potential effects of policy choices A way to understand extended periods of market failure, ‘sticky prices’ ‘sticky wages’ For macroeconomics Concept of general equilibrium theory Simultaneous-equation modeling in econometrics Neo-classical-Keynesian Synthesis Key elements of Keynesian theory by the 1960s: IS curve relating financial conditions and fiscal policy to components of GDP: Y = C(Y – T) + I (i – expe