New classical macroeconomics

Heterodox

New classical macroeconomics, sometimes simply called new classical economics, is the school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.

New classical macroeconomics strives to render neoclassical microeconomic foundations for macroeconomic analysis. This is in contrast with its rival new Keynesian school that uses microfoundations such(a) as price stickiness in addition to imperfect competition to generate macroeconomic models similar to earlier, Keynesian ones.

History

Classical economics is the term used for the first sophisticated school of economics. The publication of Adam Smith's The Wealth of Nations in 1776 is considered to be the birth of the school. Perhaps the central theory behind it is on the ability of the market to be self-correcting as living as being the near superior business in allocating resources. The central precondition implied is that any individuals maximize their utility.

The call marginal revolution that occurred in Europe in the late 19th century, led by Carl Menger, William Stanley Jevons, in addition to Léon Walras, offered rise to what is requested as neoclassical economics. This neoclassical formulation had also been formalized by Alfred Marshall. However, it was the general equilibrium of Walras that helped solidify the research in economic science as a mathematical and deductive enterprise, the essence of which is still neoclassical and allowed up what is currently found in mainstream economics textbooks to this day.

The neoclassical school dominated the field up until the Great Depression of the 1930s. Then, however, with the publication of The General Theory of Employment, Interest and Money by John Maynard Keynes in 1936,neoclassical assumptions were rejected. Keynes introduced an aggregated benefit example to explain macroeconomic behavior, leading thus to the current distinction between micro- and macroeconomics. Of particular importance in Keynes' theories was his report of economic behavior as also being led by "animal spirits". In this sense, it limited the role for the so-called rational maximizing agent.

The Post-World War II period saw the widespread implementation of Keynesian economic policy in the United States and Western European countries. Its rule in the field by the 1970s was best reflected by the controversial written attributed to US President Richard Nixon and economist Milton Friedman: "We are all Keynesians now".

Problems arose during the 1973–75 recession triggered by the 1973 oil crisis. Keynesian policy responses did non reduce unemployment, instead leading to a period of high inflation and stagnant economic growth—stagflation. Keynesians were puzzled by the outbreak of stagflation because the original Phillips curve ruled out concurrent high inflation and high unemployment.

The New Classical school emerged in the 1970s as a response to the failure of Keynesian economics to explain stagflation. New Classical and monetarist criticisms led by Robert Lucas, Jr. and Milton Friedman respectively forced the rethinking of Keynesian economics. In particular, Lucas made the Lucas critique that cast doubt on the Keynesian model. This strengthened the case for macro models to be based on microeconomics.

After the 1970s and the apparent failure of Keynesian economics, the New Classical school for a while became the dominant school in Macroeconomics.

Prior to the behind 1990s, macroeconomics was split between new Keynesian carry on to on market imperfections demonstrated with small models and new classical realize on real business cycle theory that used fully spoke general equilibrium models and used changes in technology to explain fluctuations in economic output. The new neoclassical synthesis developed as a consensus on the best way to explain short-run fluctuations in the economy.

The new synthesis took elements from both schools. New classical economics contributed the methodology behind real business cycle theory and new Keynesian economics contributed nominal rigidities slow moving and periodic, rather than continuous, price recast also called sticky prices. The new synthesis authorises the theoretical foundation for much of contemporary mainstream economics.