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A Post Keynesian Alternative to the New Consensus Model

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Macroeconomic Theory and Macroeconomic Pedagogy

Abstract

When it comes to economic policy analysis, mainstream macroeconomics today is dominated by New Consensus Models (NCMs).2 In these models aggregate demand impacts on output and employment, but only in the short run. Due to nominal and real rigidities, for which microfoundations based on imperfectly competitive markets are delivered, the short-run Phillips curve is downward sloping. In the long run, however, there is no effect of aggregate demand on the ‘Non Accelerating Inflation Rate of Unemployment’ (NAIRU), which is exclusively determined by structural characteristics of the labour market, wage bargaining institutions and the social benefit system. An inflation-targeting monetary policy using the interest rate is able to stabilize output and employment in the short run, but in the long run it is neutral and only affects inflation (Fontana and Palacio-Vera, 2007). Fiscal policy is downgraded and is restricted to supporting monetary policies in achieving price stability (Arestis and Sawyer, 2003).

This chapter is a revised, simplified and shortened version of Hein and Stockhammer (2007). There, a more formal and extensive treatment of the issues can be found. The major part of this chapter was written while Eckhard Hein was a visiting professor at Vienna University of Economics and Business Administration (WU). The hospitality of the WU is gratefully acknowledged. Many thanks go to Giuseppe Fontana and Mark Setterfield for very helpful suggestions to make the chapter more readable.

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Authors
  1. Eckhard Hein
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  2. Engelbert Stockhammer
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Editor information

Editors and Affiliations

  1. University of Leeds, UK

    Giuseppe Fontana

  2. University of Sannio, Italy

    Giuseppe Fontana

  3. Trinity College, Hartford, USA

    Mark Setterfield

Copyright information

© 2009 Eckhard Hein and Engelbert Stockhammer

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Hein, E., Stockhammer, E. (2009). A Post Keynesian Alternative to the New Consensus Model. In: Fontana, G., Setterfield, M. (eds) Macroeconomic Theory and Macroeconomic Pedagogy. Palgrave Macmillan, London. https://doi.org/10.1007/978-0-230-29166-9_15

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