About the new keynesian and new classical

A fascinating topic!

The New Keynesian and New Classical schools of thought are two major approaches in macroeconomics that emerged in the 1970s and 1980s. Both schools built upon the foundations of classical economics, but they differ significantly in their views on the role of government, the behavior of economic agents, and the causes of economic fluctuations.

New Classical School

The New Classical School, also known as the Monetarist School, was founded by economists such as Robert Lucas, Thomas Sargent, and Edward Prescott. They challenged the traditional Keynesian view of the economy and argued that:

  1. Rational Expectations: Economic agents form expectations about future economic outcomes based on all available information, including past data and current events. This means that government policies, such as monetary or fiscal interventions, are unlikely to have a lasting impact on the economy.
  2. Microfoundations: Macroeconomic phenomena, such as aggregate demand and supply, can be explained by the behavior of individual economic agents, such as households and firms.
  3. Natural Rate of Unemployment: The economy has a natural rate of unemployment, which is the rate of unemployment that occurs when the labor market is in equilibrium. The government cannot permanently reduce unemployment below this rate through monetary or fiscal policy.
  4. Monetary Policy: The primary tool for stabilizing the economy is monetary policy, which should focus on controlling inflation and maintaining a stable money supply.

New Keynesian School

The New Keynesian School, also known as the New Consensus Macroeconomics, was developed by economists such as Joseph Stiglitz, George Akerlof, and Paul Krugman. They built upon the foundations of Keynesian economics and argued that:

  1. Imperfect Information: Economic agents do not have perfect information about the economy, which leads to imperfect competition and market failures.
  2. Asymmetric Information: Some economic agents have more information than others, which can lead to market inefficiencies and government intervention.
  3. Monetary Policy: Monetary policy can have a significant impact on the economy, particularly during times of economic downturn.
  4. Fiscal Policy: Fiscal policy, such as government spending and taxation, can also have a significant impact on the economy, particularly during times of economic downturn.
  5. Animal Spirits: Economic agents' behavior is influenced by psychological and social factors, such as confidence and sentiment, which can affect aggregate demand and supply.

Key differences

The main differences between the New Classical and New Keynesian schools are:

  1. Role of Government: New Classical economists believe that government intervention is unlikely to have a lasting impact on the economy, while New Keynesian economists argue that government intervention can be effective in stabilizing the economy.
  2. Behavior of Economic Agents: New Classical economists assume that economic agents form rational expectations, while New Keynesian economists assume that economic agents are subject to imperfect information and asymmetric information.
  3. Monetary Policy: New Classical economists believe that monetary policy is the primary tool for stabilizing the economy, while New Keynesian economists argue that fiscal policy can also be effective.

In summary, the New Classical School emphasizes the importance of rational expectations, microfoundations, and monetary policy, while the New Keynesian School emphasizes the importance of imperfect information, asymmetric information, and the role of government in stabilizing the economy.