Neoclassical Synthesis / Keynesian Economics Friedman s critique:

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1 February 1 / 2, 2010 Neoclassical Synthesis / Keynesian Economics Friedman s critique: round I monetarism round II natural rate of unemployment, the expectationsaugmented Phillips-curve Non-market-clearing approach disequilibrium Keynesians Rational expectations, New classical Macro and New Keynesian Macro Post-Keynesians and Neo-Ricardians Student presentations on Blanchard: a new synthesis? How to prepare for the exam 20th century developments 18

2 Neoclassical Synthesis / Keynesian Economics (again) Hicks, John R. (1937) Mr Keynes and the Classics, Econometrica Samuelson, Paul (1948) Economics: An Introductory Analysis Phillips, A.W. (1958) The relation between unemployment and the rate of change of money wage rates in the United Kingdom Economica 20th century developments 19

3 Keynesianism vs Monetarism (round I) Milton Friedman (1956) "The Quantity Theory of Money - a Restatement." in: Studies in the Quantity Theory of Money (1963) (with Anna Schwartz) A Monetary History of the United States ( ) (1957) A Theory of the Consumtion Function. 20th century developments 20

4 Keynesianism vs Monetarism (round I) Friedman criticizes the substance of the Keynesian analysis, e.g. the magnitude or stability of central parameters (c and v) economic policy conclusions: The market economy (based on private property and competitive markets) is inherently stable. rule-oriented monetary policy as a precondition to macroeconomic stability (rejection of discretionary monetary policy and fiscal policy in crises). 20th century developments 21

5 Keynesianism vs Monetarism (round II) E.S. Phelps (1967) Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time. Economica Milton Friedman (1968) The Role of Monetary Policy. American Economic Review the natural rate of unemployment (compare to the natural rate of interest in Wicksell) 20th century developments 22

6 Non-market-clearing approach disequilibrium Keynesians (in Germany this approach was often labelled Neo-Keynesianismus) Clower, Robert W. (1965), "The Keynesian Counter- Revolution: A Theoretical Appraisal", in: Hahn, F., Brechling, F. (eds), The Theory of Interest Rates. Leijonhufvud, Axel (1968) On Keynesian Economics and the Economics of Keynes 20th century developments 24

7 Rational expectations, New classical Macro and New Keynesian Macro Muth, J.F. (1961) Rational Expectations and the Theory of Price Movements. Econometrica Sargent, T. J. and N. Wallace (1976) Rational Expectations and the Theory of Economic Policy. Journal of Monetary Economics Rational Expectations and the vertical long-term aggregate supply curve 20th century developments 25

8 Lucas, Robert E. (1976) Econometric policy evaluation. A critique. in: Karl Brunner und Alan Meltzer (Hrsg.) The Phillips curve and labour markets. Vol. 1. Carnegie-Rochester Conference on public policy, Journal of Monetary Economics, Supplement, Lucas Critique 20th century developments 26

9 Rational expectations, New classical Macro and New Keynesian Macro Mankiw, N.G. (1985) Small menu costs and large business cycles: a macroeconomic model of monopoly. Quarterly Journal of Economics Akerlof, G.A. and Yellen, J.L. (1985) A near-rational model of the business cycle, with wage and price inertia. Quarterly Journal of Economics Shapiro, C. and Stiglitz, J. (1984) Equilibrium unemployment as a discipline device. American Economic Review 20th century developments 27

10 Post-Keynesians and Neo-Ricardians Sraffa, Piero (1960) The production of commodities by means of commodities. Weintraub, Sidney (1961) Classical Keynesianism, monetary theory and the price level. Robinson, Joan (1963) Essays in the theoriy of economic growth. Shackle, George (1972) Epistemics and Economics. 20th century developments 28

11 Exam on the material covered in class three broad topics: Classical Political Economy The Emergence of the Science of the Market Markets vs. Aggregation 20th century developments 32

12 What to expect: Three questions, each of which can be answered centering on one of the three broad topics (classical political economy, the emergence of the science of the market, markets vs. aggregation) asks you to extend your argument beyond that time period / draw out lines of your argument into other time periods 20th century developments 33

13 What is expected from your essay: develop a compelling argument on the background of the knowledge acquired through readings, short paper writing and discussions in class. The main line of the argument should be elaborated in full sentences. (enumeration of key words might be useful to illustrate a point) You do not need to reproduce publication dates of major works or biographical information of economists; you should, have a general sense of their chronological order. 20th century developments 34

14 Assessment criteria will be cogency of the argument, correct presentation reference to the history of ideas persuasive presentation in terms of structure, wording, style of the argument. 20th century developments 35

15 Therefore: Before you start writing your essay: develop the structure of the argument think through the entire essay make sure that you know what you want to say / show that you know what the main steps in the argument will be that the remaining time allows you to develop all these steps in the same depth / detail 20th century developments 36

16 How to prepare: if you attended all classes and understood the material presented and if you took notes that are cogent / that allow you to reconstruct what was discussed in class work with your notes deepen your knowledge by reading the texts in the reader reread your short essays / the texts you worked on 20th century developments 37

17 How to prepare: if you did not attend class on a regular basis if you are not sure that you understood what the material presented was all about read the texts in the reader diligently Please note: since the content of Friedman (1953) has not been discussed in depth you may drop this text use the powerpoints for respective session to structure your reading and focus on the issues discussed in class 20th century developments 38

18 In any one of the above cases: work on understanding the connections between the different topics raised in class work on the individual topics as part of the larger context of the issues recurring in class think about the interrelations of the material across different time periods 20th century developments 39

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