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).
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