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Towards a New Synthesis: New Consensus Macroeconomics

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Critique of the New Consensus Macroeconomics and Implications for India

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Abstract

By the beginning of the 1980s, the triumph of the new classical and real business cycle schools was more or less complete. However led by a group of prominent economists (Akerlof, Blanchard, Stiglitz, Greenwald, Romer, Yellen, etc.) in the mid-1980s, Keynesianism made a strong revival under the new banner of neo- (or new)-Keynesianism. The neo-Keynesians tried to resurrect Keynesianism by placing it on sound micro-foundations. However, the movement seemed to lack a unifying monolithic structure. The task of integrating these different dimensions into a coherent whole was left to be accomplished by the so-called New Consensus Macroeconomics (NCM) that emerged a few years later. This chapter analyses the various aspects of neo-Keynesianism and the NCM in some detail.

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Notes

  1. 1.

    As we have seen in Chap. 2, the NAIRU is conceptually distinct from the NRU, but it is a good proxy for the latter and easier to estimate empirically.

  2. 2.

    For uniformity of nomenclature, we have used the term New Consensus Macroeconomics throughout the book.

  3. 3.

    See Mankiw (2001), Ball and Mankiw (2002), Blanchard and Katz (1997), etc., for more discussion on this point.

  4. 4.

    The concept of “ergodicity”, in common sense terms, is best explained by North (1999, p. 2) “If I say the world is ergodic, I mean that it has a stable underlying structure, such that we can develop theory that can be applied time after time, consistently”.

  5. 5.

    Of the vast literature on this topic for the sake of brevity I cite only three references, viz. Fama (1970), De Long et al. (1989) and Lowenstein and Willard (2006).

  6. 6.

    Financialization, (as a term usually, but not always, used pejoratively), refers to “the increasing importance of financial markets, financial motives, financial institutions and financial elites in the operation of the economy and its governing institutions, both at the national and international levels” (Epstein 2001, p. 1).

  7. 7.

    As noted by Bernanke (2003, p. 2) constrained discretion allows policymakers “considerable leeway in responding to economic shocks, financial disturbances and other unforeseen developments … however this discretion of policy makers is constrained by a strong commitment to keep inflation low and stable”.

  8. 8.

    Currently, about 30 countries have formally adopted the IT framework. Interestingly, their composition is heterogeneous including advanced economies, EMEs as well as some LDCs. A selective list (with years of adoption in brackets) is the following: New Zealand (1989), Canada (1991), UK (1992), Sweden (1993), Australia (1993), Korea (2001), Brazil (1999), Chile (1999), Mexico (2001), Thailand (2000), Philippines (2002), Indonesia(2005), Ghana (2007), etc. India is well on way to adopting IT in the near future.

  9. 9.

    The Taylor rule is a mechanism that sets the short-run nominal interest rate i(t) via the equation,

    \( i\left( t \right) = \left( {1 - a} \right)\left[ {r^{*} + E_{t} \left( {\pi (t + 1} \right) + bY_{g} \left( t \right) + c \left( {\pi \left( {t - 1} \right) - \pi^{*} } \right)} \right] + ai\left( {t - 1} \right) \)

    (where i(t) is the nominal interest rate at time t, r* is the “equilibrium” real rate of interest, \( Y_{g} \left( t \right),\pi \left( t \right)\;{\text{and}}\;\pi^{*} \) are the output gap (at time t), the inflation rate at time t and the inflation target, respectively).

  10. 10.

    However, as noted by several authors (see Gnos and Rochon 2007; Setterfield 2004, etc.) the NCM has no theory to support the endogeneity of money supply and tends to simply fall back upon the difficulties of controlling money supply in practice as a justification for the neglect of monetary aggregates altogether.

  11. 11.

    Both Arestis and Sawyer (2007) and Angeriz and Arestis (2007) present the model with a strong critical thrust.

  12. 12.

    The methodology of calculating the real effective exchange rate for a country is explained in detail in Takàts (2012).

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Nachane, D.M. (2018). Towards a New Synthesis: New Consensus Macroeconomics. In: Critique of the New Consensus Macroeconomics and Implications for India. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3920-8_4

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