New Neo-Classical Synthesis
Overview of Models
- Marvin Goodfriend, "Monetary Policy in the New Neoclassical Synthesis: A Primer," International Finance, v. 5, n. 2, July 2002, pp. 165–191.
- Robert G. King, "The New IS-LM Model: Language, Logic, and Limits," Federal Reserve Bank of Richmond Economic Quarterly, v. 86, n. 3, Summer 2000.
This week's reading begins the most technical part of the course — the micro-founded models of the macroeconomy. Our focus this week is on the basic economic components of these approaches; the analysis of monetary policy within these models will be next week's topic. As a result, after you skim each of the above papers for an overview, focus primarily on the sections that contain the model elements.
In the Goodfriend (2002) article, focus on sections I through V, in which the model is developed and some of its implications are discussed. Goodfriend (2002) starts with a real business cycle (RBC) model, which is basically a general equilibrium microeconomic model with exogenous shocks to the aggregate production function (i.e. "technology shocks"). You may notice that a lot of the discussion in Goodfriend (2002) resembles that in your Econ 301 textbook — this is what we mean by "micro-foundations."
King (2000) presents the canonical 3-equation New Keynesian model, with references to the relevant micro-foundations. This week we will focus on sections 1, 2, 4, and 6 — plus the conclusion and the first appendix. (We will cover sections 3 and 5 next week.) You should notice that the "New Keynesian" Philips Curve developed in King (2000) is exactly the same one that we saw in Mankiw (2000) two weeks ago.
- N. Gregory Mankiw, "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," NBER Working Paper #7884, September 2000.
Background
There isn't much explicit background reading for this week, as most of the material is not covered in the Econ 302 textbooks. Reading some of the discussion of the intellectual history of modeling the macroeconomy in those texts might be helpful; see Mankiw's text for a more directed discussion of alternative models. More useful still might well be reviewing general equilibrium in your intermediate microeconomics text.
- Mankiw: Ch. 19.
- Blanchard: Ch. 27.