Evolution of New Keynesian Economics

Abstract

In this article, the developments in the New Keynesian Economics which sprang up in USA during the ‘80s will be discussed and then the properties of the Keynesian Economics in terms of their assumptions and models will be analyzed.New Keynesian Economics is based upon the Keynesian System also considers that when the economy left to itself it will settle at less-than full-equilibrium in the short-run. Even though most of the New Keynesian economists accept rational expectations hypothesis, they refuse the perfect competition conditions and perfect elasticity of prices and wages. Hence the imperfect competition and the rigidities of prices and wages will result in the Keynesian lack-of effective demand as well as coordination failure in the market. For the long run, following the Neo-Keynesian economists, they suggest that the economy will tend towards automatic natural-rate-of-unemployment (nru) equilibrium in the long-run, apart from a few New Keynesian economists who work with Hysteresis and Efficiency Wage models. New Keynesian Economics provide the consistency between the micro- and macro-analysis and seem to be more realistic and valid for the developing countries. The representatives of the New Keynesian Economics are Alan S. Blinder, N. Gregory Mankiw, John Taylor, David Romer.