New Keynesian economics, nominal rigidities and involuntary unemployment

Abstract

This paper explores the main motivations behind new Keynesian macroeconomics in the last 15 years. It focuses on the two central issues of nominal rigidity and involuntary unemployment. It argues that the Walrasian paradigm is inherently incapable of making sense of these issues except in an ad hoc manner. Both of these issues require the adoption of a framework with price and wage making agents to be properly modelled. Even if the Walrasian approach might fit the facts in a superficial way, it will be badly wrong about welfare effects of output fluctuations. The importance of imperfect competition from a methodological perspective is that it enables us to solve several anomalies simultaneously.