New Classical Economics vs. New Keynesian Economics

Attribute	New Classical Economics	New Keynesian Economics
View on Rational Expectations	Believes in rational expectations	Also believes in rational expectations
Role of Government	Minimal role for government intervention	Supports government intervention to stabilize the economy
Price Stickiness	Believes prices are flexible and adjust quickly	Believes prices are sticky and adjust slowly
Market Clearing	Believes markets always clear	Recognizes market imperfections and frictions
Monetary Policy	Emphasizes importance of monetary policy	Focuses on both monetary and fiscal policy

Introduction

New Classical Economics and New Keynesian Economics are two schools of economic thought that emerged in the late 20th century. While they both share some similarities, they also have distinct differences in their approaches to understanding and explaining economic phenomena. In this article, we will compare the attributes of New Classical Economics and New Keynesian Economics to provide a better understanding of their key differences.

Foundations

New Classical Economics is rooted in the idea of rational expectations and the efficient market hypothesis. It posits that individuals and firms make decisions based on all available information and that markets are always in equilibrium. On the other hand, New Keynesian Economics builds on the work of John Maynard Keynes and focuses on the role of imperfect information and market imperfections in driving economic fluctuations. It argues that prices and wages are sticky and do not adjust immediately to changes in supply and demand.

Role of Government

In terms of the role of government in the economy, New Classical Economics advocates for a minimal government intervention, as it believes that markets are efficient and will self-correct in the long run. It argues that government policies, such as fiscal and monetary stimulus, are ineffective and can even be harmful to the economy. Conversely, New Keynesian Economics argues that government intervention is necessary to stabilize the economy during times of recession. It supports the use of fiscal and monetary policies to manage aggregate demand and stabilize output and employment.

Expectations

One of the key differences between New Classical Economics and New Keynesian Economics is their treatment of expectations. New Classical Economics assumes that individuals have rational expectations and form their expectations based on all available information. It argues that individuals are forward-looking and will adjust their behavior in anticipation of future events. On the other hand, New Keynesian Economics acknowledges that individuals may have adaptive expectations and may not always have perfect information about the future. It recognizes the role of uncertainty and imperfect information in shaping economic decisions.

Market Clearing

New Classical Economics emphasizes the concept of market clearing, which suggests that markets will always reach equilibrium through the adjustment of prices and wages. It argues that any deviations from equilibrium are temporary and will be corrected through market forces. In contrast, New Keynesian Economics challenges the idea of market clearing and argues that prices and wages are sticky in the short run, leading to persistent unemployment and output gaps. It suggests that government intervention is necessary to address these market imperfections.

Monetary Policy

When it comes to monetary policy, New Classical Economics advocates for a strict adherence to the principles of monetarism. It argues that central banks should focus on maintaining price stability through the control of the money supply. It believes that inflation is always a monetary phenomenon and that central banks should target a fixed rate of money growth. On the other hand, New Keynesian Economics supports a more flexible approach to monetary policy. It argues that central banks should target not only inflation but also output and employment. It supports the use of interest rate targeting and forward guidance to manage the economy.

Conclusion

In conclusion, New Classical Economics and New Keynesian Economics offer different perspectives on how the economy works and how it should be managed. While New Classical Economics emphasizes the efficiency of markets and the importance of rational expectations, New Keynesian Economics highlights the role of market imperfections and the need for government intervention to stabilize the economy. Both schools of thought have their strengths and weaknesses, and the debate between them continues to shape economic policy and theory today.