The New Neoclassical Synthesis inherits the spirit of the old, in that it combines Keynesian and classical elements. Methodologically, the new synthesis involves the systematic application of intertemporal optimiza- tion and rational expectations as stressed by Robert Lucas. In the synthe- sis, these ideas are applied to the pricing and output decisions at the heart of Keynesian models, new and old, as well as to the consumption, investment, and factor supply decisions that are at the heart of classical and RBC models. Moreover, the new synthesis also embodies the insights of monetarists, such as Milton Friedman and Karl Brunner, regarding the theory and practice of monetary policy. Thus, there are new dynamic microeconomic foundations for macro-economics. These common methodological ideas are implemented in models that range from the flexible, small models of academic research to the new rational-expectations policy model of the Federal Reserve Board. The New Neoclassical Synthesis (NNS) suggests a set of major conclusions about the role of monetary policy. First, NNS models suggest that monetary policy actions can have an important effect on real economic activity, persisting over several years, due to gradual adjustment of individual prices and the general price level. Second, even in settings with costly price adjustment, the models suggest little long-run trade-off between inflation and real activity. Third, the models suggest significant gains from eliminating inflation, which stem from increased transactions efficiency and reduced relative price distortions. Fourth, the models imply that credibility plays an important role in understanding the effects of monetary policy. These four ideas are consistent with the public statements of central bankers from a wide range of countries.
Posted on: Mon, 21 Jul 2014 13:21:54 +0000
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