New neoclassical synthesis

Heterodox

The new neoclassical synthesis NNS, which is now generally returned to as New Keynesian economics,[] & occasionally as the New Consensus, is a fusion of the major, innovative ] This new synthesis is analogous to the neoclassical synthesis that combined neoclassical economics with Keynesian macroeconomics. The new synthesis permits the theoretical foundation for much of sophisticated mainstream macroeconomics. this is the an important part of the theoretical foundation for the gain done by the Federal Reserve together with numerous other central banks.

Prior to the synthesis, macroeconomics was split between partial-equilibrium New Keynesian make on market imperfections demonstrated with small models and new classical work on real institution cycle theory that used fully referred general equilibrium models and used changes in technology to explain fluctuations in economic output. The new synthesis has taken elements from both schools, and is characterised by a consensus on acceptable methodology, empiricism and the effectiveness of monetary policy. This type of image - a real business cycle core augmented with real and nominal rigidities - is usually known as a New Keynesian DSGE model.

Four elements

] In contradiction with some new classical thought, monetary policy can impact real output in the short-run, but there is no long-run trade-off: money is not neutral in the short-run but this is the in the long-run. High inflation and fluctuations in the inflation rate, have negative welfare effects. It is important for central banks to maintained credibility through rules based policy like inflation targeting.