Mych11 - Ch. 11 Keynesianism: Wage/Price Rigidity...

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Ch. 11 Keynesianism: Wage/Price Rigidity 1 Motivation Wage rigidity Price Rigidity Policies for stabilization Zero-bound
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2 Motivation The Classicals maintain Unemployment is ‘frictional’, due to ‘mismatch’ Money is ‘neutral’, so anti-cyclical policy is unhelpful Cyclical fluctuation is due to either money-based , due to misperception or, has real causes, as Eugen Slutsky showed, the system can aggregate random shocks into cycles, (See below, from Ch. 10 of text)
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Figure 10.3  Small shocks and large cycles Cyclical pattern Random Shocks from Economic structure produces
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4 I. Critique of Classical School on Keynesians: The Classical School view is rooted in the micro-foundations of macro-economics - It is the ‘only game in town’; - Keynesianism is jerry-built.
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5 Wage rigidity as claimed by Keynes N D NS u, involuntary  unemployment at wage w w
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6 To Lucas, w can only be defined by market clearance. Workers did not offer wage cut to stay on job. So NS N D NS w
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II. Keynesians disagree and claim that: Wages and Prices can be sticky, stuck in recession/depression not just according to observations but also arising from logic reasoning Rigidity can be integrated into IS-LM, AD-AS paradigm Studies in labor economics offer help Markets are not always cleared (as in competitive equilibrium) Government policy is defensible in such a framework Money is not neutral, when one looks deeper Business fluctuations have explanations in Keynesian context
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Mych11 - Ch. 11 Keynesianism: Wage/Price Rigidity...

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