newkeynesian

newkeynesian - New Keynesian Theory New Graduate...

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New Keynesian Theory New Keynesian Theory Graduate Macroeconomics I ECON 309 – Cunningham
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2 New Classical View New Classical View of Keynesian Economics of Keynesian Economics “Failure on a grand scale.” Made up of ad hoc assumptions, not built on a strong foundation of rational agents. Must assume rational, optimizing agents. Must assume that markets clear. Keynesians do not explicitly handle expectations, and expectations have been shown to be critically important. Have not given explicit structural explanations of wage stickiness. How can you explain persistence in business cycles?
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3 New Keynesian Response (1) New Keynesian Response (1) Persistence: There have been and are persistent and substantial deviations from full employment. There is nothing to the persistence question. Unemployment in Great Britain was greater than or equal to 10% from 1923-1939. U.S. Great Depression, unemployment was greater than or equal to 14% for 10 years.
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4 New Keynesian Response (2) New Keynesian Response (2) Extreme Informational Assumptions NK’s accept that adaptive expectations are ad hoc and unrealistic Unconstrained REH implies unrealistically sophisticated agents Bounded rationality Structural impediments
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5 New Keynesian Economics New Keynesian Economics Attempts to build Keynesian arguments based upon rational expectations and microeconomic foundations. Examples: Contracting models Sticky price models based upon transactions cost or menu costs Efficiency wage models
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6 New Keynesian Models (1) New Keynesian Models (1) Sticky Prices Menu costs and other transactions costs: It costs to change prices. A firm might hold prices constant even if demand fell if the firm faced a cost to the price change. Costs: loss of customer good will Potential price war Menu costs
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7 New Keynesian Models (2) New Keynesian Models (2) Efficiency Wage Models Firms wish to buy worker effort, not their “attendance”. Instead of Y = F(K,N) , the firm really operates according to Y = F(K,eN), where N is the number of workers or worker-hours, and e is the effort per worker. The firm does not seek to minimize the cost of labor, but rather seeks to minimize the cost per efficiency unit.
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8 New Keynesian Models (3) New Keynesian Models (3) Efficiency Wages, continued By paying the worker more than the equilibrium wage for labor, the firm may reduce the cost per efficiency unit by reducing the costs associated with: Paying supervisors (monitoring costs) Hiring replacement workers when the current workers
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This note was uploaded on 02/25/2012 for the course CHEM 309 taught by Professor Staff during the Spring '11 term at UConn.

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newkeynesian - New Keynesian Theory New Graduate...

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