New Keynesian Economics: A Monetary Perspective

S ince John Maynard Keynes wrote the General Theory of Employment, Interest, and Money in 1936, Keynesian economics has been highly influential among academics and policymakers. Keynes has certainly had his detractors, though, with the most influential being Milton Friedman, Robert Lucas, and Edward C. Prescott. Monetarist thought, the desire for stronger theoretical foundations in macroeconomics, and real business cycle theory have at times been at odds with Keynesian economics. However, Keynesianism has remained a strong force, in part because its practitioners periodically adapt by absorbing the views of its detractors into the latest “synthesis.” John Hicks’s IS-LM interpretation of Keynes (Hicks 1937) and the popularization of this approach, particularly in Samuelson’s textbook (Samuelson 1997), gave birth to the “neoclassical synthesis.” Later, the menu cost models developed in the 1980s were a response to a drive for a more serious theory of sticky prices (Mankiw 1985, Caplin and Spulber 1987). More recently, New Keynesian economists have attempted to absorb real business cycle analysis and other ideas from post-1972 macroeconomics into a “new neoclassical synthesis” (Goodfriend and King 1997). The important New Keynesian ideas, as summarized, for example in Clarida, Galı́, and Gertler (1999) and Woodford (2003), are the following: