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References
For a detailed discussion of this proposition see Buiter (1980) and Gordon (1982).
Regarding evidence for Germany, Scheide (1984) finds evidence in favor of New Classical models using Granger noncausality tests. However, Learner (1985) forcefully argues that Granger noncausality tests are silent on causation in an economic sense, and Hansen (1989) shows that Scheide’s results are not robust with respect to specification.
For an introduction into RBC models see Plosser (1987).
Mankiw (1990: 19) writes on RBC models: “The business cycle is, according to this theory, the natural and efficient response of households and firms to changes in the available production technology.”
See Goodfriend and King (1997) for a comprehensive discussion of this issue. Blanchard (1990: 801) notes that given the complexity of models with intertempo-ral optimization, the focus on real business cycles may be justified as a tractable and necessary first step towards a richer macroeconomic model.
Empirical evidence from SVAR models to this effect is provided by Gottschalk and Van Zandweghe (2001).
See, for example, Fuhrer and Schuh (1998: 4).
A number of New Classical economists have attempted to provide evidence that anticipated money growth has no real effects, see for example Barro (1977). A critical review of this work can be found in Buiter (1983) and Mishkin (1982). The latter author attempts to develop a more reliable methodology and finds that anticipated monetary policy does seem to matter.
For a survey of the methodological challenges in this regard and available empirical evidence see for example Friedman (1995). Cochrane (1998) provides evidence on the effects of anticipated monetary policy using the SVAR methodology for US data. Gottschalk and Höppner (2001) extend and apply his methodology to euro area data.
See, for example, Clarida et al. (1999). For this reason, Ball and Mankiw (1994a: 132) remark that “new Keynesians” could just as easily be called “new monetarists.” The implications of the acceptance of the natural rate hypothesis will be discussed in the next chapter in more detail.
Gordon (1982: 1089) labels this approach with the acronym NRH-GAP, which stands for the combination of the long-run Natural Rate Hypothesis with the short-run Gradual Adjustment of Prices.
For a discussion of the role of rational expectations in modern macroeconomics see also McCallum (1999: 3). He also points out that the strong association of the hypothesis of rational expectations with the policy ineffectiveness proposition was a widespread misconception in the 1970s and early 1980s.
For a simple, formal illustration of this point, see Buiter (1980: 40ff).
Barro (1979) puts this more technically by noting that not all feasible trades that are to the perceived mutual advantage of the exchanging parties have been exhausted in this situation.
See Gordon (1990: 1139ff.) on the indexation puzzle.
Sometimes this label is also used for the type of models associated for instance with authors like Barro and Grossman (1976) or Malinvaud (1977), where prices are assumed to be initially fixed. These models emphasize that economic agents face quantity restrictions on some markets following a disturbance, since lack of price flexibility implies that markets do not always clear. This section does not refer to this research direction, since these models assume price stickiness without providing the micro-foundations for this feature.
While New Keynesian economics primarily explain why changes in nominal demand have real effects due to lack of full price flexibility, this approach also helps to account for the output effects of real demand shocks like changes in government spending. In this context it is helpful to note that the effect of a change in money supply on output is usually modeled via its effect on real money balances, which enter the aggregate demand function. If one interprets the money term in the aggregate demand equation as a shift term, it becomes clear that a change in real demand, which shifts aggregate demand too, works through the same transmission channels as a change in money. For a more detailed discussion of this point see Ball et al. (1988: 17).
For a more detailed discussion of the building blocks of New Keynesian models see Ball et al. (1988). This section draws very much on their work and in addition on the survey by Ball and Mankiw (1994a).
For a more detailed discussion of sources of a nonlinear aggregate supply curve see Ball and Mankiw (1994a: 145ff;). However, Ball and Mankiw (1994b: 248) provide a counterexample where this kind of asymmetry does not provide a rationale for demand stabilization.
As regards this argument, Ball and Mankiw (1994a: 143) write: “It is no more appropriate to insist on an exact identification of menu costs than it is to demand the social security number of the Walrasian auctioneer.”
See also Jeanne (1998) for a dynamic general equilibrium model where real rigidities in the labor market amplify nominal rigidities in the goods markets.
In the literature two forms of price staggering are discussed. With “time-contingent” price adjustment a firm adjusts prices at intervals of fixed length, while with “state-contingent” adjustment it does so whenever the state of the economy warrants it in the sense that the deviation between the actual price and the optimal price given the state of the economy makes it worthwhile to pay the “menu costs” and to adjust the price. Taylor (1979) shows for “time-contingent” adjustment that staggering produces considerable inertia of the price level. For a discussion of “state-contingent” adjustment see Ball and Mankiw (1994a: 140ff.).
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(2005). The Rational Expectations Revolution. In: Monetary Policy and the German Unemployment Problem in Macroeconomic Models. Kieler Studien - Kiel Studies, vol 334. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-37679-8_3
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