New Keynesian Economics
Categories: Econ
Move over, Classical Keynesians...the New Keynesians are in town.
New Keynesian Economics is like the OG Keynesian macroeconomic school of thought, but with some tweaks.
New Keynesians were born in the 1980s when reality didn’t seem to be matching up with the predominate Keynesian theory of the times. The difference? New Keynesians believe that wages and prices are sticky...like sticky rice. When stuff hits the fan, prompting a change in wages and prices, things change...but slowly. Retailers don’t change their prices at the drop of a hat, and employees’ wages don’t change quickly in response to market changes either. This lag, known as stickiness, helps bridge the gap between theoretical classical Keynesian economics and the real world, giving cause for government intervention.
While this new assumption might reflect reality, New Keynesians still have trouble explaining why it’s rational for a monopolistically competitive firm to keep prices constant, accepting sales numbers. Maybe they’re worried about reputation and consumer expectations? Maybe it's because of asymmetric information and imperfect competition? We can only speculate. And we will.