The New-Keynesian Approach to Monetary Policy Analysis: Lessons and New Directions

The New-Keynesian (NK) approach to monetary policy analysis has emerged in recent years as one of the most influential and prolific areas of research in macroeconomics.¹ It has provided us with a framework that combines the theoretical rigor of Real Business Cycle (RBC) theory with Keynesian ingredients like monopolistic competition and nominal rigidities. That framework has also become the basis for the new generation of models being developed at central banks, and increasingly used for simulation and forecasting purposes.² In the present chapter, I will try to summarize what I view as some of the key lessons that have emerged from that research program and to point to some of the challenges it faces, as well as possible ways of overcoming these challenges.

Paper presented at the Center for Financial Studies Symposium on “The Science and Practice of Monetary Policy Today,” Frankfurt, October 4, 2007. Much of the research described in this paper is based on joint work with Olivier Blanchard, Rich Clarida, and Mark Gertler, who should get credit for all the valuable insights. I remain solely responsible for any misrepresentation of that work.