by “New Keynesian” DSGE models To be fair to academia, it has realized that the pure DSGE model is incapable of explaining observable phenomena so they have introduced numerous amendments, known, oddly, as “imperfections” in the model. Long-term nominal contracts, other labour market frictions, imperfection in credit markets, all these and more are prayed in aid and, either rigorously or more usually ad hoc, introduced into the model, generating lags that mean it can be represented as fitting the data. Most central banks have a modified DSGE model of this kind … These modified models are often referred to as “New Keynesian”, presumably because the dead cannot sue for defamation. Gerald Holtham Yes indeed — “New Keynesianism” is a gross misnomer. The
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“New Keynesian” DSGE models
To be fair to academia, it has realized that the pure DSGE model is incapable of explaining observable phenomena so they have introduced numerous amendments, known, oddly, as “imperfections” in the model. Long-term nominal contracts, other labour market frictions, imperfection in credit markets, all these and more are prayed in aid and, either rigorously or more usually ad hoc, introduced into the model, generating lags that mean it can be represented as fitting the data. Most central banks have a modified DSGE model of this kind …
These modified models are often referred to as “New Keynesian”, presumably because the dead cannot sue for defamation.
Yes indeed — “New Keynesianism” is a gross misnomer. The macroeconomics of people like Greg Mankiw has a lot to do with Milton Friedman, Robert Lucas and Thomas Sargent — and very little, or next to nothing, to do with the founder of macroeconomics, John Maynard Keynes.
If macroeconomic models — no matter what ilk — assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists — regardless of being New Monetarist, New Classical or “New Keynesian” — ought to do some ontological reflection and heed Keynes’ warnings on using thought models in economics:
The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error.