By Michel De Vroey
This ebook retraces the heritage of macroeconomics from Keynes's common concept to the current. critical to it's the distinction among a Keynesian period and a Lucasian - or dynamic stochastic common equilibrium (DSGE) - period, each one governed by way of particular methodological criteria. within the Keynesian period, the booklet experiences the next theories: Keynesian macroeconomics, monetarism, disequilibrium macro (Patinkin, Leijongufvud, and Clower) non-Walrasian equilibrium types, and first-generation new Keynesian versions. 3 levels are pointed out within the DSGE period: new classical macro (Lucas), RBC modelling, and second-generation new Keynesian modeling. The ebook additionally examines a couple of chosen works aimed toward proposing possible choices to Lucasian macro. whereas no longer eschewing analytical content material, Michel De Vroey specializes in important exams, and the types studied are offered in a pedagogical and bright but severe means.
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Extra info for A History of Macroeconomics from Keynes to Lucas and Beyond
The IS curve represents the combination of the nominal income and nominal interest rates for which investment and savings are equal. It is assumed that investment varies negatively with the interest rate and that saving is a positive function of income. The LM curve, which Hicks called the LL curve, indicates the combinations of income and interest rates that represent equality between the supply of and the demand for money. The latter has two components. As in The General Theory, the ﬁrst one, the transaction demand for money is a positive function of income, the second one, the speculative demand for money, an inverse function of the interest rate.
It must be underlined that Hicks assumed nominal-wage rigidity in both the classical and the Keynesian subsystem. This followed from his pragmatic viewpoint on the rigidity versus ﬂexibility issue. According to him, the choice between these two assumptions needed to reﬂect the reality of the moment. His opinion was that, at the time, the rigidity assumption was more relevant than the ﬂexibility assumption. 2 Hicks had little interest in demonstrating the existence of involuntary unemployment. Although he did not like the term, he took its cause, wage rigidity, as a fact of life, at least in some circumstances.
This is exactly what Hicks’s model does, displaying both a stumbling block for the traditional monetary recommendation (the liquidity trap) and an alternative remedy (acting on the IS through ﬁscal policy). modigliani’s transformation of hicks’s model The IS-LM model as it stands in macroeconomics textbooks is widely believed to be a direct transcription of Hicks’s own model. However, this is not the case. The transition from Keynes’s economics to Keynesian economics was a twostep process, of which Hicks’s models constituted the ﬁrst stage.