10. Postwar Macro - 26. A History of Postwar Monetary...

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26. A History of Postwar Monetary Economics and Macroeconomics Kevin D. Hoover Subject Economics » History of Thought , Macroeconomics DOI: 10.1111/b.9780631225737.2003.00027.x 26.1 World War II as a Transitional Period Despite a degree of arbitrariness, World War II provides a natural division in the history of macroeconomics. The macroeconomics of the interwar period was a rich tapestry of competing models and methodologies, pursued with a sophistication that was only gradually regained in the postwar period (see chs. 19 and 20; Laidler, 1999 ). John Maynard Keynes's The General Theory of Employment, Interest and Money , published in 1936, three years before the onset of war in Europe, appeared to many as an important, but not preeminent, contribution to the contemporary debates. Yet, by 1945, Keynesian macroeconomics was clearly ascendant. Keynes provided a conceptual framework that greatly simplified professional discussions of macroeconomic policy. The main elements were: (i) an aggregative analysis - his key distinction between the economics of individual or firm decision-making, taking aggregate output as fixed, and the economics of output and employment as a whole supplies the content, if the not the name, of the now common distinction between microeconomics and macroeconomics; (ii) the determination of aggregate output by aggregate analogues to Marshallian supply and demand; (iii) the possibility (even likelihood) that aggregate supply and demand could determine a level of output at which resources were not fully employed; and (iv) the possibility that monetary and fiscal policies could boost aggregate demand to counteract unemployment. The decade after the publication of The General Theory was a period of exploration, investigation, and consolidation - a period in which the Keynesian model was forged into the paradigm that guided mainstream macroeconomic analysis for the next three decades. John Hick's (1937) IS-LL model (later renamed the IS-LM model) emerged as the canonical representation of the Keynesian system. The downward-sloping IS curve represented combinations of interest rates and output for which planned savings (directly related to income or output) and planned investment (inversely related to interest rates) were equal. The upward-sloping LM curve represented combinations in which the demand for money (directly related to income and inversely related to interest rates) equaled the fixed supply of money. The crossing point determined the level of aggregate demand. Hicks placed little stress on aggregate supply, while Modigliani's (1944) influential Keynesian model offered a highly simplified aggregate-supply curve: perfectly elastic at the current price level up to full employment and inelastic at full employment - a reverse L-shaped curve in price/output space.
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These models simplified Keynes's account in an effort to render it into a closed set of algebraic equations. They represented the core structure of The General Theory
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This note was uploaded on 03/31/2010 for the course ECONOMICS 321 taught by Professor H during the Spring '10 term at Kadir Has Üniversitesi.

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10. Postwar Macro - 26. A History of Postwar Monetary...

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