Wednesday, September 11, 2013

Krugman Describes How New Keynesian Economics Is Self-Adjusting

The New Keynesian's differ from the Old Keynesian's in important ways.  As long as central banks make the right decisions the economy is self-adjusting at full-employment.  Paul Krugman provides the economic model used by New Keynesian's which is also used by many central banks.  It works fine unless we reach the zero lower bound for interest rates as we have done today in the US.  At that point,  the Fed should use more unconventional monetary policies and expansionary fiscal policy, which has been contractionary in the US in the last three years.  He blames our current employment shortfall on bad economic policies. The old Keynesian's don't believe that the economy self-adjusts to full-employment, or that it has a tendency towards full-employment if there is no government intervention. 

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