‘New Keynesian’ price stickiness

7 Mar, 2023 at 21:00 | Posted in Economics | 1 Comment

‘New Keynesian’ macroeconomists have for years been arguing (e.g. here) about the importance of the New Classical Counter Revolution in economics. ‘Helping’ to change the way macroeconomics is done today — with rational expectations, Euler equations, intertemporal optimization, and microfoundations — their main critique of New Classical macroeconomics is that it didn’t incorporate price stickiness into the Real Business Cycles models developed by the New Classicals. So — the ‘New Keynesians’ adopted the methodology suggested by the New Classcials and just added price stickiness!

6a00d8341c652b53ef01630539828a970d-800wiBut does putting a sticky-price DSGE lipstick on the RBC pig really help?

It sure doesn’t!

A pig with lipstick is still a pig:

I regard the term “sticky prices” and other similar terms as very unhelpful and misleading; they are a kind of mental crutch that economists are too ready to rely on as a substitute for thinking about what are the actual causes of economic breakdowns, crises, recessions, and depressions. Most of all, they represent an uncritical transfer of partial-equilibrium microeconomic thinking to a problem that requires a system-wide macroeconomic approach. That approach should not ignore microeconomic reasoning, but it has to transcend both partial-equilibrium supply-demand analysis and the mathematics of intertemporal optimisation.

David Glasner

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  1. OK, so RBC models are the rather unattractive pigs and an assertion that prices are “sticky” in some vaguely specified way (e.g. “menu costs” that slow price adjustment) are a cosmetic improvement or disguise for the ugliness?
    Glasner wants to transcend the mathematics of inter temporal optimization (which I understand to be at the core of RBC modeling). “transcend”? on the way to understanding how and why the economy stumbles and bumbles, breaking down, falling into recession or experiences moments of “crisis”.
    “Stop talking rubbish” is no doubt sound advice in many circumstances and also advice not often taken by human beings en masse.
    If we could learn anything from the practice of the mathematics of inter temporal optimization, I would think it would be the utter impossibility of undertaking the smooth and efficient allocation of resources through time as a practical task, most especially a shared task assigned to social mechanisms. “transcend” the impossible?!? What else could one do with it?
    The political economy as an assemblage of institutions and social organization is machinery assigned to any number of “impossible” tasks — of course it fails regularly and conspicuously. If economists were to think about the actual economy as a system, it would have to be thinking about a system of kludges, bridging the past to the future, expediently or poorly but never “optimally”.
    The tradition of “thinking” thru the medium of beautiful, ideal models of a market economy mechanically arriving at optimal solutions ought to lead to the discoveries that a market economy, per se, is impossible and why it is impossible. Not to the false pretense that we have a “market economy” (when anyone with eyes to see can look at the reality of a heavily bureaucratized economy) and the delusional propaganda of the neoliberals that follow from that induced mass psychosis.

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