by Summers and Stansbury only get it half right The new Keynesian school emerged from the synthesis, propelled by the invention of a slew of frictions and rigidities – staggered contract negotiations perturbing labor markets, “menu costs” of changing prices and wages, prices locked into inefficient levels by contracts, probabilistic price revision, monopsony power of firms in labor markets, on and on. In the process, any and all discussion of effective demand was submerged. The new Keynesian inventors are now the ruling elders of macroeconomics, unlikely to change their minds. So much for Keynes for now, but Summers and Stansbury might remember with Max Planck that science advances one funeral at a time. They are certainly correct in saying that “the role
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Summers and Stansbury only get it half right
The new Keynesian school emerged from the synthesis, propelled by the invention of a slew of frictions and rigidities – staggered contract negotiations perturbing labor markets, “menu costs” of changing prices and wages, prices locked into inefficient levels by contracts, probabilistic price revision, monopsony power of firms in labor markets, on and on. In the process, any and all discussion of effective demand was submerged.
The new Keynesian inventors are now the ruling elders of macroeconomics, unlikely to change their minds. So much for Keynes for now, but Summers and Stansbury might remember with Max Planck that science advances one funeral at a time. They are certainly correct in saying that “the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.” Convincing their peers is far more easily said than done …
Summers and Stansbury, to their credit, point to fundamental contradictions that central bankers confront. They cannot control inflation in a world of conflicting claims. The bankers’ chosen instrument, the interest rate, has little macroeconomic traction. How institutions largely determine output, employment, and inflation is beyond their ken. Demand drives output and prices, but it is not clear that the fiscal expansion Summers and Stansbury propose will boost inflation under existing labor market institutions. It is possible that both wage equality and inflation could rise if economic expansion combined with supportive regulation boosts workers’ bargaining power in the labor market.