New directions in stabilisation policies
DOI:
https://doi.org/10.13133/2037-3643/9832Keywords:
Business Cycle, Cycle, Equilibrium, Macroeconomics, New Keynesian, Rational Expectation, StabilizationAbstract
Recently, a new class of macroeconomic business cycle models has emerged. Stochastic dynamic general equilibrium models with rational expectations originally employed by RBC researchers are combined with nominal rigidities and imperfect competition traditionally highlighted by New Keynesian economists. This class of models leads to a new paradigm in business cycle theory and stabilization policies. The paper presents the main characteristics and implications of the new class of models in a predominantly non-technical way. In order to highlight the progress connected with the new class of models, it puts them into the context of former debates on stabilization policy, such as the Phillips curve dispute.
JEL Codes: E12, E13, E23, E31, E32, E52, E63
References
ALTIG, D, L.J. CHRISTIANO, M. EICHENBAUM and J. LINDE (2002), "Technology shocks and aggregate fluctuations", Northwestern University, Chicago, mimeograph.
ANDOLFATTO, D. (1996), "Business cycles and labor-market search", American Economic Review, vol. 86, no. 1, pp. 112-32.
ARNOLD, L.G. (2002), Business Cycle Theory, Oxford University Press, Oxford.
BASU, S., J. FERNALD and M. KIMBALL (1998), "Are technology improvements contractionary?", International Finance Discussion Paper, no. 625, Federal Reserve Board.
BEETSMA, R. and H. JENSEN (2002), "Monetary and fiscal policy interaction in a micro-founded model of a monetary union", ECB Working Paper, no. 166, European Central Bank, Frankfurt.
BLANCHARD, O. (1997), "Comment", NBER Macroeconomics Annual, pp. 289-93.
BLANCHARD, O. and N. KIYOTAKI (1987), "Monopolistic competition and the effects of aggregate demand", American Economic Review, vol. 77, no. 4, pp. 647-66.
CALVO, G. (1983), "Staggered prices in a utility-maximizing framework", Journal of Monetary Economics, vol. 12, no. 3, pp. 383-98.
CANZONERI, M.B., R.E. CUMBY and B.T. DIBA (2002), "Recent developments in the macroeconomic stabilization literature: is price stability a good stabilization strategy?", Georgetown University, Washington, mimeograph.
CANZONERI, M.B., R.E. CUMBY and B.T. DIBA (2002), "The need for international policy coordination: what's old, what's new, what's yet to come?", NBER Working Paper, no. 8765, Cambridge, Mass.
CHARI, V.V., P.J. KEHOE and E. MCGRATTAN (2000), "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?", Econometrica, vol. 68, no. 5, pp. 1151-79.
CHRISTIANO, L.J., M. EICHENBAUM and C.L. EVANS (1997), "Sticky price and limited participation models: a comparison", European Economic Review, vol. 41, no. 6, pp. 1201-49.
CHRISTIANO, L.J., R. VIGFUSSON and M. EICHENBAUM (2004), "The response of hours to a technology shock: evidence based on direct measures of technology", Journal of the European Economic Association, vol. 2, no. 2-3, pp. 381-95.
CLARIDA, R., J. GALÍ and M. GERTLER (1999), "The science of monetary policy: a new Keynesian perspective", Journal of Economic Literature, vol. XXXVII, December, pp. 1661-707.
CLARIDA, R., J. GALÍ and M. GERTLER (2001), "Optimal monetary policy in open versus closed economies: an integrated approach", American Economic Review (Papers and Proceedings), vol. 79, no. 2, pp. 248-52.
CLARIDA, R., J. GALÍ and M. GERTLER (2002), "A simple framework for international monetary policy analysis", Journal of Monetary Economics, vol. 49, no. 5, pp. 879-904.
COOLEY, T.F. (1995), Frontiers in Business Cycle Research, Princeton University Press, Princeton.
COOLEY, T.F. and G.D. HANSEN (1989), "The inflation tax in a real business cycle model", American Economic Review, vol. 79, no. 4, pp. 733-46.
ERCEG, C., D. HENDERSON and A. LEVIN (2000), "Optimal monetary policy with staggered wage and price setting", Journal of Monetary Economics, vol. 46, no. 2, pp. 281-313.
FRANCIS, N. and V. RAMEY (2001), "Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited", University of California at San Diego, San Diego, mimeograph.
FRIEDMAN, B. (2003), "The LM curve: a not-so-fond farewell", NBER Working Paper, no. 10123, Cambridge, Mass.
FUHRER, J.C. (1997), "The (un)importance of forward looking behavior in price setting", Journal of Money, Credit and Banking, vol. 29, no. 3, pp. 338-50.
FUHRER, J.C. and G.R. MOORE (1995), "Inflation persistence", Quarterly Journal of Economics, vol. 110, no. 1, pp. 127-60.
GALÍ, J. (1999), "Technology, employment, and the business cycle: do technology shocks explain aggregate fluctuations?", American Economic Review, vol. 89, no. 1, pp. 249-71.
GALÍ, J. (2002), "New perspectives on monetary policy, inflation and business cycle", in M. Dewatripont, L. Hansen and S. Turnovsky eds, Advances in Economic Theory, vol. III, Cambridge University Press, Cambridge, pp. 51-197.
GALÍ, J. (2004), "On the role of technology shocks as a source of business cycles: some new evidence", Journal of the European Economic Association, vol. 2, no. 2-3, pp. 372-80.
GALÍ. J. and M. GERTLER (1999), "Inflation dynamics: a structural econometric analysis", Journal of Monetary Economics, vol. 44, no. 2, pp. 195-222.
GALÍ, J., M. GERTLER and D. LÓPEZ-SALIDO (2001), "European inflation dynamics", European Economic Review, vol. 45, no. 7, pp. 1237-70.
GERTLER, M., S. GILCHRIST and F.M. NATALUCCI (2001), "External constraints on monetary policy and the financial accelerator", mimeograph.
GOODFRIEND, M. (2002), "Monetary policy in the new neoclassical synthesis: a primer", International Finance, vol. 5, no. 2, pp. 165-91.
GOODFRIEND, M. and R. KING (1997), "The new neoclassical synthesis and the role of monetary policy", NBER Macroeconomics Annual, pp. 231-83.
HALL, R.E. (1978), "Stochastic implications of the life cycle-permanent income hypothesis: theory and evidence", Journal of Political Economy, vol. 86, no. 6, pp. 971-87.
HALL, R.E. (1988), "Intertemporal substitution in consumption", Journal of Political Economy, vol. 96, no. 2, pp. 339-57.
HALL, R.E. (1988), "The relationship between price and marginal cost in U.S. industry", Journal of Political Economy, vol. 96, no. 5, pp. 921-47.
IRELAND, P.N. (2002), "Endogenous money or sticky prices", NBER Working Paper, no. 9390, Cambridge, Mass.
KIMBALL, M. (1995), "The quantitative analytics of the basic neomonetarist model", Journal of Money, Credit, and Banking, vol. 27, no. 4, pp. 1241-77.
KING, R.G. (2000), "The new IS-LM model: language, logic, and limits", Federal Reserve Bank of Richmond Economic Quarterly, vol. 86, no. 3, pp. 45-103.
KING, R.G. and A. WOLMAN (1996), "Inflation targeting in a St. Louis model of the 21st century", Federal Reserve Bank of St. Louis Review, vol. 78, no. 3, pp. 83-107.
LINNEMANN, L.A. and SCHABERT (2003), "Fiscal policy in the new neoclassical synthesis", Journal of Money, Credit, and Banking, vol. 35, no. 6, pp. 911-29.
LUCAS, R.E. (1973), "Some international evidence on output-inflation tradeoffs", American Economic Review, vol. 63, no. 3, pp. 326-34.
MANKIW, N.G. and R. REIS (2002), "Sticky information versus sticky prices: a proposal to replace the new Keynesian Phillips curve", Quarterly Journal of Economics, vol. 117, no. 4, pp. 1295-328.
MCCALLUM, B.T. and E. NELSON (1999), "An optimizing IS-LM specification for monetary policy and business cycle analysis", Journal of Money, Credit, and Banking, vol. 31, no. 3, pp. 296-316.
MCCALLUM, B.T. and E. NELSON (1999), "Nominal income targeting in an open economy optimizing model", Journal of Monetary Economics, vol. 43, no. 3, pp. 553-78.
MCGRATTAN, E.R. (1994), "The macroeconomic effects of distortionary taxation", Journal of Monetary Economics, vol. 33, no. 3, pp. 573-601.
MERZ, M. (1995), "Search in the labor market and the real business cycle", Journal of Monetary Economics, vol. 36, no. 2, pp. 269-300.
MEYER, L.H. (2001), "Does money matter?", Federal Reserve Bank of St. Louis Review, vol. 83, no. 5, pp. 1-15.
ROTEMBERG, J.J. and M. WOODFORD (1999), "The cyclical behavior of prices and costs", in J.B. Taylor and M. Woodford eds, Handbook of Macroeconomics, Elsevier Publisher, New York et al., pp. 1051-135.
SHAPIRO, M.D. and M. WATSON (1988), "Sources of business cycle fluctuations", NBER Macroeconomics Annual, pp. 111-48.
SHEA, J. (1998), "What do technology shocks do?", NBER Macroeconomics Annual, pp. 275-310.
SMETS, F. and R. WOUTERS (2002), "An estimated stochastic dynamic general equilibrium model of the Euro area", ECB Working Paper, no. 171, European Central Bank, Frankfurt.
SYLOS LABINI, P. (1988), "The great debates on the laws of returns and the value of capital: when will economists finally accept their own logic?", Banca Nazionale del Lavoro Quarterly Review, vol. 41, no. 166, pp. 263-91.
TAYLOR, J.B. (1980), "Aggregate dynamics and staggered contracts", Journal of Political Economy, vol. 88, no. 1, pp. 1-23.
TAYLOR, J.B. (1999), "Staggered price and wage setting in macroeconomics", in J.B. Taylor and M. Woodford eds, Handbook of Macroeconomics, Elsevier Publisher, New York et al., pp. 1009-050.
TAYLOR, J.B. (1999), Monetary Policy Rules, University of Chicago Press, Chicago.
UHLIG, H. (2004), "Do technology shocks lead to a fall in total hours worked?", Journal of the European Economic Association, vol. 2, no. 2-3, pp. 361-71.
WOODFORD, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, Princeton.
YUN, T. (1996), "Nominal price rigidity, money supply endogeneity, and business cycles", Journal of Monetary Economics, vol. 37, no. 2, pp. 345-70.