Two Anti-Keynesian Myths

This is mainly of involvement to economists, but given the importance of these issues, I receive got tried to write it inwards an accessible manner.

Stephen Williamson, inwards David Glasner propose that this sentiment is non uniquely Keynesian - I could as telephone telephone it monetarist, for example. But what so are the criteria you lot volition role to bound the Keynesian laid today? Different views nigh unconventional monetary policy? Different views nigh the efficacy of financial policy at the zip lower bound? This seems way likewise narrow. People receive got views nigh the relative merits of financial policy for all kinds of reasons, which may hold out real context specific, so this does non facial expression similar a skillful method of defining a label for economists today.  

Yet non everyone is a Keynesian using my deliberately wide definition. The exclusively logical way to brand feel of statements similar those discussed commenting on this David Glasner propose that this sentiment is non uniquely Keynesian - I could as telephone telephone it monetarist, for example. But what so are the criteria you lot volition role to bound the Keynesian laid today? Different views nigh unconventional monetary policy? Different views nigh the efficacy of financial policy at the zip lower bound? This seems way likewise narrow. People receive got views nigh the relative merits of financial policy for all kinds of reasons, which may hold out real context specific, so this does non facial expression similar a skillful method of defining a label for economists today.  

Yet non everyone is a Keynesian using my deliberately wide definition. The exclusively logical way to brand feel of statements similar those discussed post, remarks acidly that

“Part of what defines a Keynesian (new or old), is that a Keynesian thinks that his or her views are "mainstream," too that the ease of macroeconomic idea is defined relative to what Keynesians recollect - Keynesians reside at the see of the universe, too everything else revolves or so them.”

In that postal service I was careful to distinguish betwixt academic inquiry too policy. Of course of pedagogy macroeconomists inquiry many things, too exclusively a minority are using New Keynesian models, too in all probability fifty-fifty some of those practise non actually necessitate the New Keynesian bit. That is the slap-up affair nigh abstraction. Working alongside what tin hold out called ‘flex price’ models does non imply that you lot recollect cost rigidity is unimportant, but instead that it tin oftentimes hold out ignored if you lot desire to focus on other processes. So inwards terms of inquiry I talked nigh the meaning split beingness betwixt mainstream too heterodox. In terms of research, mainstream macroeconomists speak the same language.

I used the term anti-Keynesian inwards the context of macroeconomic policy, too inwards this context I was non talking nigh academics, but the laid of economists involved alongside macro policy. They could hold out academics, but they could hold out working for key banks, a finance ministry, or an international arrangement similar the International Monetary Fund or OECD. For this group, I recollect nosotros receive got skillful argue to believe that the large bulk are non anti-Keynesian.

Just look, for example, at whatsoever key banking concern publication discussing recent movements inwards output. This volition typically focus on movements inwards components of aggregate demand: consumption, investment etc. The argue is a belief that output inwards the brusk run is demand determined. That, for me, is the defining characteristic of Keynesian analysis. If you lot facial expression at the inwardness models used inwards key banks (which, dissimilar models used yesteryear academics, necessitate to hold out ‘horses for all courses’) the same volition hold out true.

Now David Glasner propose that this sentiment is non uniquely Keynesian - I could as telephone telephone it monetarist, for example. But what so are the criteria you lot volition role to bound the Keynesian laid today? Different views nigh unconventional monetary policy? Different views nigh the efficacy of financial policy at the zip lower bound? This seems way likewise narrow. People receive got views nigh the relative merits of financial policy for all kinds of reasons, which may hold out real context specific, so this does non facial expression similar a skillful method of defining a label for economists today.  

Yet non everyone is a Keynesian using my deliberately wide definition. The exclusively logical way to brand feel of statements similar those discussed Nick Rowe too David Glasner propose that this sentiment is non uniquely Keynesian - I could as telephone telephone it monetarist, for example. But what so are the criteria you lot volition role to bound the Keynesian laid today? Different views nigh unconventional monetary policy? Different views nigh the efficacy of financial policy at the zip lower bound? This seems way likewise narrow. People receive got views nigh the relative merits of financial policy for all kinds of reasons, which may hold out real context specific, so this does non facial expression similar a skillful method of defining a label for economists today.  

Yet non everyone is a Keynesian using my deliberately wide definition. The exclusively logical way to brand feel of statements similar those discussed here, for example, is to imagine nosotros are inwards a footing where output is determined from the render side, so if 1 detail factor of demand, similar authorities spending on goods too services, goes downward its comport on on output volition hold out offset yesteryear some means. That is an anti-Keynesian view. My showtime anti-Keynesian myth is that amid economists involved alongside policy this is non a minority view.

The mo myth is that all you lot necessitate to justify this anti-Keynesian sentiment is to uncovering that reward too prices displace inwards reply to booms too recessions. For instance Roger Farmer David Glasner propose that this sentiment is non uniquely Keynesian - I could as telephone telephone it monetarist, for example. But what so are the criteria you lot volition role to bound the Keynesian laid today? Different views nigh unconventional monetary policy? Different views nigh the efficacy of financial policy at the zip lower bound? This seems way likewise narrow. People receive got views nigh the relative merits of financial policy for all kinds of reasons, which may hold out real context specific, so this does non facial expression similar a skillful method of defining a label for economists today.  

Yet non everyone is a Keynesian using my deliberately wide definition. The exclusively logical way to brand feel of statements similar those discussed points to negative inflation next the Great Depression. Language tin hold out confusing here. As an analogy, suppose someone has been ill, too you lot enquire them whether they are at nowadays better. Do you lot hateful improve than they were (but withal ill), or completely recovered? For us to accept an anti-Keynesian view, nosotros practise non simply require prices to move, nosotros require them to displace yesteryear simply the amount needed so that nosotros tin ignore demand. So, for example, inwards an opened upwardly economic scheme nether fixed central rates, for a devaluation to receive got no demand comport on requires prices to instantly rising yesteryear the same amount. Prices volition get down to rising for sure, but ‘flexible prices’ agency to a greater extent than than that.

If nosotros accept a uncomplicated shut economy, so ‘flexible prices’ is brusk for the existent involvement charge per unit of measurement (nominal rates less expected inflation) ever beingness at its ‘natural level’, which is the grade that ensures demand matches supply. This instantly tells you lot that nosotros are non simply talking nigh cost flexibility, but also monetary policy. Imagine inwards this economic scheme at that topographic point is a negative demand shock, caused yesteryear a autumn inwards authorities spending. In this economy, the immediate comport on is that firms volition cut output as good as prices. To offset this, the natural involvement charge per unit of measurement volition autumn to growth somebody consumption. Will the actual existent involvement charge per unit of measurement practise the same? This could occur without prices changing if the key banking concern cutting nominal rates yesteryear precisely the required amount. It could occur without the key banking concern doing anything to nominal rates if expected inflation rose by precisely the required amount. Or it could hold out some combination of the two.

One justification for assuming that the existent involvement charge per unit of measurement is ever at its natural grade is that monetary policy is super efficient, moving nominal rates to ever offset the comport on of demand shocks. For some argue this is non an declaration anti-Keynesians commonly make. The option justification is that, conditional on whatever monetary policy does, prices displace yesteryear just the amount required to hand you lot the expected inflation charge per unit of measurement necessary to generate the natural existent involvement rate, too thence offset the demand shock.

This becomes clear when nominal involvement rates are stuck at the zip lower bound. In that case, the natural existent involvement charge per unit of measurement is large too negative, but monetary policy cannot larn at that topographic point because nominal involvement rates cannot hold out negative. For flexible prices to larn you lot to that existent charge per unit of measurement you lot would necessitate expected inflation to hold out significantly positive. (We at nowadays believe at that topographic point is no independent David Glasner propose that this sentiment is non uniquely Keynesian - I could as telephone telephone it monetarist, for example. But what so are the criteria you lot volition role to bound the Keynesian laid today? Different views nigh unconventional monetary policy? Different views nigh the efficacy of financial policy at the zip lower bound? This seems way likewise narrow. People receive got views nigh the relative merits of financial policy for all kinds of reasons, which may hold out real context specific, so this does non facial expression similar a skillful method of defining a label for economists today.  

Yet non everyone is a Keynesian using my deliberately wide definition. The exclusively logical way to brand feel of statements similar those discussed Pigou effect (or existent residue effect) that volition salve the day.) As Roger shows, actual inflation from 1929 to 1933 was persistently negative. One must presume that inflation expectations were also negative. So clearly although prices were moving, they were non moving inwards the way required for the anti-Keynesian sentiment to hold. Far from casting dubiousness on the Keynesian story, falling prices during the Great Depression present how unrealistic the anti-Keynesian sentiment is.