The Cowles Commission Approach, Real Business Cycle Theories, and New Keynesian Economics

The final Part IV attends Schumpeter’s legacy. To begin with, this chapter examines how his monetary ideas got left behind during his lifetime and the subsequent decades. First, it addresses the success of Keynes. While his Treatise on Money had pre-empted the field by advocating some very similar ideas, the General Theory was even more detrimental to Schumpeter, precisely because Keynes had abandoned many of the very elements they had previously held in common. Next the chapter turns to the Neo-Keynesian synthesis, which attracted many of Schumpeter’s disciples at Harvard such as Paul Samuelson or James Tobin. After a brief discussion of monetarism, the attention finally turns to the evolution of modern general equilibrium models, beginning with its origin in the Real Business Cycle analysis and moving on to the New Keynesian DSGE models.

Download Full-text

New Keynesian Macroeconomic Model and Monetary Policy in Pakistan

The Pakistan Development Review ◽

10.30541/v54i1pp.55-71 ◽

2015 ◽

Vol 54 (1) ◽

pp. 55-71

Author(s):

Shahzada M. Naeem Nawaz ◽

Ather Maqsood Ahmed

Keyword(s):

Monetary Policy ◽

Business Cycle ◽

The State ◽

Monetary Authority ◽

New Keynesian ◽

Real Business Cycle ◽

Structural Shocks ◽

Svar Model ◽

Forward Looking

The New Keynesian (NK) models have advantage over the Real Business Cycle (RBC) models as they allow rigidities in the structure of the model, hence provide built-in mechanism to incorporate the structural shocks. The estimation of the NK model for Pakistan’s economy remains a relatively unexplored area. This study attempts to estimate a closed economy version of the NK model using robust econometric technique. On the empirical side macroeconomic dynamics have been investigated in response to unanticipated monetary shock. The reaction of the monetary authority (the State Bank of Pakistan) in response to structural shocks has been assessed by exploring the role of forward looking expectations. The SVAR model has been employed to estimate the structural parameters. The response of macroeconomic aggregates to structural shocks has also been simulated along with discussing the forecast error variance decomposition. The role of forward looking expectations is found to play prominent role in the prevailing market structure of the country. The State Bank of Pakistan (SBP) has been found to respond to shocks after a lag of one or more periods indicating time inconsistency problem which is due to discretionary monetary policy stance being adopted by the monetary authority. The distorted beliefs of economic agents about the stance of monetary policy have pointed towards weak effectiveness of the monetary policy. The results suggest that the SBP would have to adopt an independent and transparent monetary policy by following some sort of Taylor-type rule. JEL Classification: C32, C51, E52, E58 Keywords: New Keynesian Models, Real Business Cycle Models, Forward Looking Expectations, SVAR Model, Price Puzzle

Download Full-text

Real Business Cycles: A New Keynesian Perspective

The Journal of Economic Perspectives ◽

10.1257/jep.3.3.79 ◽

1989 ◽

Vol 3 (3) ◽

pp. 79-90 ◽

Cited By ~ 184

Author(s):

N. Gregory Mankiw

Keyword(s):

Business Cycle ◽

Primary Source ◽

New Keynesian ◽

Economic Fluctuations ◽

Real Business Cycle ◽

Business Cycle Theory ◽

Macroeconomic Policies ◽

Real Business Cycles ◽

The Business Cycle ◽

Random Fluctuations

Real business cycle theory is the latest incarnation of the classical view of economic fluctuations. It assumes that there are large random fluctuations in the rate of technological change. In response to these fluctuations, individuals rationally alter their levels of labor supply and consumption. The business cycle is, according to this theory, the natural and efficient response of the economy to changes in the available production technology. In this essay, I appraise this newly revived approach to the business cycle. In my view, real business cycle theory does not provide an empirically plausible explanation of economic fluctuations. Both its reliance on large technological disturbances as the primary source of economic fluctuations and its reliance on the intertemporal substitution of leisure to explain changes in employment are fundamental weaknesses. Moreover, to the extent that it trivializes the social cost of observed fluctuations, real business cycle theory is potentially dangerous. The danger is that those who advise policymakers might attempt to use it to evaluate the effects of alternative macroeconomic policies or to conclude that macroeconomic policies are unnecessary.

Download Full-text

NEW PERSPECTIVES ON DEPRECIATION SHOCKS AS A SOURCE OF BUSINESS CYCLE FLUCTUATIONS

Macroeconomic Dynamics ◽

10.1017/s1365100512000910 ◽

2013 ◽

Vol 18 (6) ◽

pp. 1209-1233 ◽

Cited By ~ 18

Author(s):

Francesco Furlanetto ◽

Martin Seneca

Keyword(s):

Business Cycle ◽

New Keynesian ◽

Real Business Cycle ◽

New Keynesian Model ◽

Aggregate Fluctuations ◽

The Real ◽

Business Cycle Fluctuations ◽

Shock Process ◽

Keynesian Model ◽

Capital Depreciation

In this paper we study the transmission of capital depreciation shocks. The existing literature in the real business cycle tradition has concluded that these shocks are irrelevant to business cycle fluctuations. We show that they are potentially important drivers of aggregate fluctuations in a new Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients that generate co-movement across real variables.

Download Full-text