Table of ContentsIntroductionProgress of New Keynesian EconomicsCriticisms of New Keynesian EconomicsConclusionReferencesIntroductionNew Keynesian Economics attempts to provide a microeconomic basis for sticky wages and prices (Gartner, 2013). In macroeconomics, the “Keynes versus the classics” debate began in the 1930s and has continued in various forms until today. For example, during the "great inflation" of the 1970s, faced with the skepticism of the new classical school of the real economic cycle, the new Keynesians revised the poorly performing Keynesian wage and price adjustment equations to take into account the impact of inflation expectations and supply shocks on supply. the Philips curve. In the 1980s, the debate between neoclassical real equilibrium business cycle theorists and the New Keynesian school was dominant (Snowdon and Vane, 2005). Although Lucas and Sargent et al. (undated, cited in Snowdon and Vane, 2005) argued that there are problems with the empirical basis of Keynesian models, it is undeniable that Keynesian economics is promising because it helps to explain and understand a large number of observations and experiences in the past. and current, which cannot be achieved by other macroeconomic methods. Some economists even believe that Keynesian economics, which takes into account the fundamental truths contained in the neoclassical synthesis, can reassert its domination over macroeconomics (Snowdon and Vane, 2005). This essay will critically discuss the progress and shortcomings of New Keynesian economics. Say no to plagiarism. Get Custom Essay on “Why Violent Video Games Should Not Be Banned”?Get Original EssayProgress of New Keynesian EconomicsThere is a huge difference between Old and New Keynesian Economics. New Keynesianism is “new” because it has two characteristics. The first is that it starts from microeconomics, which means that conditions are looked at at the micro level, then aggregate production and the second is that it always uses rational expectations. But the new Keynesian economists claim to be "Keynesians", not because they follow Keynes, but because they represent a new method of justifying the old macro statement. In essence, New Keynesian economics recognized the importance of various flaws in reality (Stiglitz, 2000, cited in Snowdon and Vane, 2005). Furthermore, the difference between old and new Keynesians is that the latter tend to assume nominal rigidity, while the former tend to explain wage and price rigidity based on an acceptable microscopic basis. New Keynesian economists reconstructed Keynesian economics by leveraging the foundations of modern microeconomic theory and sought to perfect theoretical flaws (because of the imperfections of typical market economics, aggregate supply should vary with demand global) on the supply side of the old economy. "Keynesian models. The development of the new Keynesian economy had to face the crisis of the Keynesian economic theory exposed by Lucas in the 1970s. We can therefore say that the objective of the new Keynesian theorists was to correct the defects and contradictions of the old Keynesian model and to construct a coherent theory of total supply capable of rationalizing the rigidity of wages and prices (Snowdon and Vane, 2005). ), it is a question of finding a strict and convincing model of rigidity of wages and/orprice, based on maximizing behavior and rational expectations. In some ways, New Keynesian economics may be more realistic. than the new classical economy. New classical economics assumes that the market continues to clear and that the economy is not constrained by lack of effective demand. The characteristic of Keynesian economics is that there is no continuous market equilibrium. In both the old and new Keynesian models, the inability of prices to change in time to clear the market meant that shocks to demand and supply would have a significant impact on output and employment. Keynesians believe that deviations from the balance between output and employment can be serious and long-lasting, which can harm economic well-being (Snowdon and Vane, 2005). Gordon (1993, cited in Snowdon and Vane, 2005) argues that the appeal of Keynesian economics comes from the evident dissatisfaction of workers and businesses in times of recession and depression, i.e. unemployment involuntary. New Keynesians argue that a business cycle theory based on the inability of markets to clear is more practical than neoclassical theory or real business cycle theory. New Keynesians believe that business cycle theory based on the inability of markets to clear is more practical than New Classical theory or real business cycle theory (Snowdon and Vane, 2005). More precisely, according to the neoclassical real monetary and economic cycle. According to this theory, all agents are price takers, and the new classical economists believe that economic agents pursuing their own interests have rational expectations about the future and take corresponding actions. Thus, perfect and immediate flexibility of prices and wages guarantees that any anticipated monetary shock will cause an immediate rise in nominal wages and prices towards a new equilibrium level, thus maintaining production and employment, in which unemployment is a voluntary phenomenon. In other words, all monetary policy is fundamentally useless and ineffective for the economy. However, New Keynesian economics emphasizes market imperfection (small menu costs, i.e. costs incurred by firms due to price changes, or micro-rigidity can lead to rigidity macroeconomic.), and believes that price makers dominate the market. the economy, and economic agents pursuing their own interests cannot see everything in the future and act accordingly. This makes it difficult for prices to adjust quickly according to changes in supply and demand, so as to achieve the goal of market equilibrium. The model of real wage rigidity can generate involuntary unemployment in the long-run equilibrium. In an extremely laissez-faire market, it takes a long time for the economy to automatically move from non-equilibrium to equilibrium, which will cause losses to the economy. Therefore, it can be said that government policy intervention is necessary and beneficial. As a result, the claims of New Keynesian economics may be more in line with the real world. Indeed, even if the New Keynesians agreed with some neoclassical explanations, the assumptions of neoclassical economics about the rational expectations of economic agents in economic activity were too strict (Snowdon and Vane, 2005). According to Greenwald and Stiglitz (1993, cited in Snowdon and Vane, 2005), the new classical theory of the real economic cycle is based on a micro-foundation, which assumes that there is no imperfect competition, incomplete markets, heterogeneous work andasymmetric information. - problems related to economics, but this can be considered impossible in reality. Finally, by explaining the stylized facts of the economic cycle, we can say that the New Keynesian model is relatively successful. Especially for economists who view involuntary unemployment as stylized facts and seek explanations, the new Keynesian theory based on imperfect competition may be superior to the new classical or real theory of the business cycle (Carlin and Soskice, 1990, cited in Snowdon and Vane, 2005). Criticisms of New Keynesian Economics The development of New Keynesian economics is due to the fact that the traditional Keynesian model does not have a coherent microeconomic foundation for wage and price rigidity. But for this reason, the exploration of New Keynesianism has been limited to theoretical categories and empirical research is seriously insufficient (Snowdon and Vane, 2005). Fair (1992, cited in Snowdon and Vane, 2005) believes that the development of new Keynesian economics has ensured that macroeconomics is no longer limited to its econometric foundations. He also suggested that New Keynesians connect all their views and integrate them into a verifiable macro-econometric structural model. Laidler (1992, cited in Snowdon and Vane, 2005) even advocated the reestablishment of empirical evidence regarding the direction of macroeconomic studies. However, New Keynesian economists can still refute that Blinder's (1991, 1994, cited in Snowdon and Vane, 2005) data analysis of evidence of price stickiness, which can be seen as stylized facts, is research empirical. skepticism of neoclassical economics, neo-Keynesian economics has a pathological emphasis on the micro basis, which leads to the emergence of many irrelevant theories, which Blanchard (1992, cited in Snowdon and Vane, 2005) and d Other economists also admit to being a flaw. . And because there are too many explanations for wage and price inertia, New Keynesian economists cannot even reach consensus on rigid sources and give a unified answer (Snowdon and Vane, 2005). According to Snowdon and Vane (2005), the menu cost theory has also been questioned. It is suspected that the cost of menus will lead to a substantial reduction in production and employment (Barro, 1989, cited in Snowdon and Vane, 2005). Research by Caplin and Spulber (1987, cited in Snowdon and Vane, 2005) shows that menu costs can be important for individual businesses, but cannot cause overall macroeconomic fluctuations. In this regard, neo-Keynesians believe that the development of a truly rigid theory can increase the influence of nominal rigidity on production and employment (Romer, 2001, cited in Snowdon and Vane, 2005). Additionally, models with menu costs (firm costs due to price changes) will have multiple equilibria. Rotemberg (1987, cited in Snowdon and Vane, 2005) pointed out that when multiple equilibria emerge, it is difficult to know how the economy will respond to a particular government policy. Tobin (1993, cited in Snowdon and Vane, 2005) believes that the theory of nominal and/or price rigidity in Keynesian economics is problematic. He argues that wage and price flexibility can worsen recession, but agrees that nominal wage rigidity in Keynesian theory can soften the aggregate demand shock. However, nominal wage stickiness is theoretically achievable, but as workers can treat nominal wages as reductions in real wages (because workers cannot know the status..