In my gut, I feel there must be a way to reconcile the mainstream New Keynesian model with the mechanistically accurate way many heterodox economists (mostly thinking of Post-Keynesians here) describe the functioning of the monetary system. There will likely be some irreconcilable gaps, particularly when we start to move away from the monetary system, but it may be possible in a rough sense. I feel this way because most of the time, the two sides can’t even agree on their disagreements (okay, at least the participants on the internet). To me, that’s a sign there’s a serious element of cross-talk whereby each side is speaking a different language.
Nick Rowe’s attempt at using ISLM to reverse engineer Modern Money Theory (MMT), and thus by extension many elements of the broader Post-Keynesian school, is one attempt at reconciliation that I think is a start, and perhaps a good one. I’m not sure I’ve seen similar efforts on the banking side of the economy, but that may be because banks haven’t been an integral part of most mainstream models.
I hope to further explore this issue as I learn more, obviously recognizing I could be very wrong. But I know I am in good company. For example, Steve Randy Waldman frequently expresses hope on his blog. Additionally, Scott Fullwiler has said in the past that what likely separates the mainstream from a large portion of Post-Keynesian economics is consensus on whether or not the natural rate exists. Nick Rowe has expressed tentative agreement on this as well. Obviously, this is a massive issue to tackle, but at least we’d be getting somewhere!
And it’s not as if New Keynesian models are completely inconsistent with the Post-Keynesian view of the economy. For example, Post-Keynesians are always lamenting the gaps between mainstream economists’ understanding of central banking and banking practitioners' understanding. But they’re not alone in this. One of Michael Woodford’s goals in Interest and Prices, referred by some as the mainstream "bible of modern monetary economics," was to unify the “curious disjunction between theory and practice” with respect to banking – those are Woodford’s words from the book. He includes in the book further criticism of the relevance of much past academic work to real-world monetary policy implementation. One of his attempts to rectify this is to include within his models the feature that nominal interest rates are fixed by the central bank. That’s a big deal and is a key element of most Post-Keynesians’ models. So why all the disagreement, for example, of the impact of the deficit on U.S. sovereign debt interest rates and inflation? It could be a poor understanding of and/or communication of the results of actual mainstream models by some economists with media platforms. But I think the natural rate is a more likely candidate…
Nick Rowe’s attempt at using ISLM to reverse engineer Modern Money Theory (MMT), and thus by extension many elements of the broader Post-Keynesian school, is one attempt at reconciliation that I think is a start, and perhaps a good one. I’m not sure I’ve seen similar efforts on the banking side of the economy, but that may be because banks haven’t been an integral part of most mainstream models.
I hope to further explore this issue as I learn more, obviously recognizing I could be very wrong. But I know I am in good company. For example, Steve Randy Waldman frequently expresses hope on his blog. Additionally, Scott Fullwiler has said in the past that what likely separates the mainstream from a large portion of Post-Keynesian economics is consensus on whether or not the natural rate exists. Nick Rowe has expressed tentative agreement on this as well. Obviously, this is a massive issue to tackle, but at least we’d be getting somewhere!
And it’s not as if New Keynesian models are completely inconsistent with the Post-Keynesian view of the economy. For example, Post-Keynesians are always lamenting the gaps between mainstream economists’ understanding of central banking and banking practitioners' understanding. But they’re not alone in this. One of Michael Woodford’s goals in Interest and Prices, referred by some as the mainstream "bible of modern monetary economics," was to unify the “curious disjunction between theory and practice” with respect to banking – those are Woodford’s words from the book. He includes in the book further criticism of the relevance of much past academic work to real-world monetary policy implementation. One of his attempts to rectify this is to include within his models the feature that nominal interest rates are fixed by the central bank. That’s a big deal and is a key element of most Post-Keynesians’ models. So why all the disagreement, for example, of the impact of the deficit on U.S. sovereign debt interest rates and inflation? It could be a poor understanding of and/or communication of the results of actual mainstream models by some economists with media platforms. But I think the natural rate is a more likely candidate…
I think you can read some articles of Louis-Philippe Rochon (don't have a ready list) where he argues that NKE models are really different although superficially they may seem minor differences. Also note Mankiw says the Keynesian in NKE is a misnomer - it is better to call it New Monetarism.
ReplyDeleteDefinitely possible. I am nowhere near familiar enough with the models of either side to issue a confident opinion here.
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