New Keynesian and Neo-Keynesian Economics

Schools inspired by John Maynard Keynes proliferate. Consequently, brand names matter. Unfortunately, in this and other respects in economics, the profession is unfree to choose from anything other than the undifferentiated products of the American market. General equilibrium theory was bastardised, notwithstanding strong protests from its pioneers, in its transport to the alien terrain of macroeconomics. Accordingly, market clearing became the benchmark, a travesty of the raison d’être of macroeconomics. Thus, only optimisation exercises conducted by infinitely lived agents came to pass muster as
legitimate macroeconomics.

In a time-honoured fashion, some ingenuous theorists imagined a real world and threw sand in the wheels of the market process. Frictions of various kinds were introduced into a notional economy. The devices would not pass empirical social science muster. Serious scholars distinguish and specify slow-moving and fast-moving variables. The starred values of variables remained unchanged as statistical proxies of concepts from the general equilibrium of the textbooks. On the other hand, there are current values of variables. The task before representative agents and policymakers is to minimise the distance between actual and optimal values. Only now it took time to get to the non-accelerating inflation rate of unemployment (NAIRU) through least-squares learning because of pebbles on the path to equilibrium. The measuring rod of an economy remained the output gap despite its dubious analytical status. Policy respected inflation targeting and Ricardian equivalence.