Core Macroeconomics, Hilary Term 2013

Week 7: New Keynesian Microfoundations

The New Keynesian project has aimed to update Keynesian macroeconomics by a) integrating the insights of rational expectations and forward-looking intertemporal choice and b) exploring how nominal rigidities at the aggregate level can be related to our understanding of optimising behaviour at the micro-level. This week's essay asks you to delve into New Keynesian theory in more detail than we have done thus far.

Readings

Romer, D. Advanced Macroeconomics Chapter 6.
In Parts A and B, strike a balance between taking the maths seriously and getting lost in them. Part C is perhaps more difficult, especially the dynamic models in Sections 9-10, for which you should probably just read the "implications" subsection and skip the maths. Section 6.7 in Part B can be skipped.

Ball, L., Mankiw, N.G., and Romer, D., "The New Keynesian Economics and the Output-Inflation Trade-off", Brookings Papers on Economic Activity, 1988. (Reprinted as Ch. 6 in N.G. Mankiw and D. Romer (eds.) New Keynesian Economics, 1991.)

Mankiw, N.G., "Small Menu Costs and Large Business Cycles", Quarterly Journal of Economics, 1985 (also Ch. 1 in the Mankiw and Romer volume).

Mankiw, N.G., and Romer, D., "Introduction" in their edited volume cited above.

Prof. Wren-Lewis' Lectures 4 and 7, and the associated items from his reading list, including:

Symposium on "Keynesian Economics Today", Journal of Economic Perspectives, vol. 7, no. 1 (1993).
Clarida, R., Gali, J., and Gertler, M., "The Science of Monetary Policy: A New Keynesian Perspective", Journal of Economic Literature vol. 37 (1999) - early sections.
Woodford, M., "Revolution and Evolution in Twentieth-Century Macroeconomics", manuscript downloadable from his webpage .

Assignment

Please write an essay discussing the following proposition.

"Contracts are too short and menu costs are too small. Therefore price rigidity is not enough to explain large and prolonged recessions." (From the 2010 finals exam)