New Keynesian vs. Original Keynesian

Attribute	New Keynesian	Original Keynesian
Focus	Short-term price rigidities	Long-term price rigidities
Expectations	Rational expectations	Adaptive expectations
Monetary Policy	Active role in stabilizing economy	Passive role, focus on fiscal policy
Market Imperfections	Imperfect competition, sticky prices	Imperfect competition, sticky wages

Introduction

Keynesian economics is a school of economic thought that originated with the ideas of British economist John Maynard Keynes. Over time, two main branches of Keynesian economics have emerged: Original Keynesian and New Keynesian. While both branches share some similarities, they also have distinct differences in their approach to economic theory and policy.

Keynesian Economics Overview

Keynesian economics is based on the idea that in the short run, the level of economic output is determined primarily by aggregate demand. This means that changes in consumer spending, investment, government spending, and net exports can have a significant impact on the overall level of economic activity. Keynesian economists argue that government intervention is necessary to stabilize the economy during periods of recession or inflation.

Original Keynesian Economics

Original Keynesian economics, also known as traditional Keynesian economics, is based on the ideas put forth by John Maynard Keynes in his seminal work "The General Theory of Employment, Interest, and Money." Original Keynesians believe that prices and wages are sticky in the short run, meaning that they do not adjust quickly to changes in demand. This leads to situations where the economy can become stuck in a recessionary or inflationary spiral.

Original Keynesians advocate for government intervention in the form of fiscal policy to stabilize the economy. They argue that during times of recession, the government should increase spending and cut taxes to stimulate demand. Conversely, during periods of inflation, the government should reduce spending and raise taxes to cool down the economy.

New Keynesian Economics

New Keynesian economics is a more modern interpretation of Keynesian theory that incorporates insights from microeconomics and emphasizes the role of market imperfections in the economy. New Keynesians believe that prices and wages are sticky due to factors such as menu costs, coordination failures, and imperfect information.

Unlike Original Keynesians, New Keynesians focus on the role of monetary policy in stabilizing the economy. They argue that central banks can use interest rate adjustments and other monetary tools to influence aggregate demand and smooth out fluctuations in the business cycle. New Keynesians also emphasize the importance of expectations and forward-looking behavior in shaping economic outcomes.

Comparing Attributes

While both Original Keynesian and New Keynesian economics share the fundamental belief in the importance of aggregate demand and government intervention, they differ in their emphasis on the mechanisms through which the economy operates and the policy tools that should be used to stabilize it.

• Original Keynesians focus on fiscal policy, advocating for changes in government spending and taxes to manage demand fluctuations.
• New Keynesians emphasize monetary policy, arguing that central banks can use interest rate adjustments to influence economic activity.
• Original Keynesians view prices and wages as sticky due to market imperfections and advocate for direct government intervention to address these imperfections.
• New Keynesians incorporate insights from microeconomics and emphasize the role of market imperfections in shaping economic outcomes.

Conclusion

In conclusion, both Original Keynesian and New Keynesian economics offer valuable insights into how the economy operates and how policymakers can respond to economic fluctuations. While Original Keynesians focus on fiscal policy and the stickiness of prices and wages, New Keynesians emphasize monetary policy and market imperfections. By understanding the differences between these two branches of Keynesian economics, policymakers can make more informed decisions about how to stabilize the economy and promote long-term growth.