NEW CLASSICAL MACROECONOMIC THEORY AND FISCAL RULES: SOME METHODOLOGICAL PROBLEMS

Abstract

This paper evaluates the theoretical basis of New Classical Macroeconomics (NCM) in general, and in particular the basis of one of NCM's main policy conclusions, namely fiscal rules. We analyse NCM in terms of its assumptions of market clearing and rational expectations formations and show how its call for fiscal rules is derived. We argue that NCM is describing a static world with no uncertainty. Indeed, we argue that fixed fiscal rules can only make sense in such a world. In view of NCM's instrumentalist position, its predictions are then discussed in light of the empirical evidence. The results are discouraging for proponents of NCM. Our conclusion is that NCM has low explanatory and predictive power and, as such, does not provide a strong basis for determining economic policy.