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ECON2004Lecture07

ECON2004Lecture07 - New classical economics That the...

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ECON2004 Macro Term 1, Lecture 7: New classical economics 1 Lecture 7: New Classical Economics Reading. Core: Blanchard 8.2 Carlin and Soskice 1.4, 3.1 Burda and Wyplosz, Ch 14 Optional: “Stagflation, the remix”, The Economist, 5/5/2005 “How big a threat? ”, The Economist, 4/11/2004 Advanced: cepa.newschool.edu/het/essays/keynes/epitaph.htm Stadler, George W, (1994), "Real Business Cycles", Journal of Economic Literature 32 (4), pp.1750-1783. ECON2004 Macro Term 1, Lecture 7: New classical economics 2 New classical economics “That the predictions of Keynesian economics were wildly incorrect and that the doctrine on which they were based was fundamentally flawed, are now simply matters of fact, involving no subtleties of economic theory. The task which faces contemporary students of the business cycle is that of sorting through the wreckage, determining which features of the remarkable intellectual event called the Keynesian revolution can be salvaged and put to good use, and which others must be discarded” (Lucas and Sargent, (1978)) Adaptive expectations Rational expectations - Policy ineffectiveness - Real Business Cycles
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ECON2004 Macro Term 1, Lecture 7: New classical economics 3 How do people form expectations? y z e α μ π π + + + = in this period, inflation is sometimes positive, sometimes negative. Think of it as mean of zero hit by white noise shocks. This means the Phillips curve is and there is a ECON2004 Macro Term 1, Lecture 7: New classical economics 4 How do people form expectations?
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