SchoolsMacroConceptsSchoolsPolicyModels
Macroeconomic school

New Keynesian

New Keynesian on recessions, inflation, policy, and the mechanism it treats as decisive.

Mainstream tradition

School thesis

New Keynesian macro keeps rational expectations but rejects frictionless adjustment. It asks how nominal rigidities, imperfect competition, and policy rules move output and inflation.

New Keynesian starts from markets can be forward-looking and still display sticky prices, sticky wages, and real short-run policy effects.

Mechanism: nominal rigidities, imperfect competition, and expectations jointly shape inflation and output. Policy instinct: use credible monetary policy and targeted stabilization with explicit attention to expectations.

Use when

The binding channel is visible

Microfounded sticky prices (Calvo, Rotemberg, or menu-cost specifications), monetary non-neutrality at business-cycle horizons, an optimal-policy framework with welfare-relevant frictions, and a forward-looking expectations channel that runs through the term structure.

Evidence burden

Show timing and measurement

Phillips-curve regressions that include expected inflation and output gaps fit the post-1985 sample better than purely backward-looking specifications.

Rival check

Name the stronger alternative

Persistent flat Phillips curves under genuine slack across multiple business cycles, breaking the model's core monetary-non-neutrality channel.

Mechanism chain

From claim to policy rule

Claim

Binding constraint

Markets can be forward-looking and still display sticky prices, sticky wages, and real short-run policy effects.

Mechanism

Transmission

Nominal rigidities, imperfect competition, and expectations jointly shape inflation and output.

Policy read

Policy implication

Use credible monetary policy and targeted stabilization with explicit attention to expectations.

Mechanism

Required conditions

The claim needs each step in the data; a missing link weakens the whole interpretation.

Friction

Prices and wages reset slowly

Calvo, Rotemberg, menu-cost, and wage-friction devices give monetary policy real short-run effects.

Expectation

Forward-looking behavior still matters

Inflation and output respond to expected future policy, marginal costs, and credibility.

Rule

Policy stabilizes the gap

A credible rate rule tries to close inflation and output gaps while avoiding instability or indeterminacy.

Reads the economy through

nominal rigidities / policy transmission / microfoundations

Lineage

Lineage and inheritance

Historical moves show which problem the tradition was built to solve and which claim it keeps defending.

1970s-1980s

Microfounding Keynesian frictions

The school rebuilt Keynesian stabilization with optimizing agents, imperfect competition, and sticky nominal contracts.

1999

The science of monetary policy

Clarida, Gali, and Gertler summarized the policy-rule New Keynesian synthesis.

2003

Interest and Prices

Woodford made interest-rate rules, expectations, and welfare-based stabilization the canonical grammar.