New Keynesian Hysteresis Models

Abstract

During the stagflation of „70s, the Keynesian System fell from favor in the academic circles while Monetarism and, in particular, New Classical Economics became widely spread. The years „80s witnessed implementation of economic policies in line with Monetarism and the New Classical School, but unemployment, far from being removed automatically, increased and recession deepened.Hence during this decade these two schools fell from favor in the academic circles and in the US academic circles a new school, New Keynesian economics began to take hold.The new Classicals had criticized the Keynesian System severely because its macro analysis had no micro foundations and its result, i.e. unemployment due to lack of demand was inconsistent with the result of full employment reached in the traditional microeconomics which was based on perfect competition. To meet this criticism of methodology, the New Keynesians went into microeconomics foundations of Keynesian macro analysis, but they rejected the relevance of traditional microeconomics and instead accepted imperfectly competitive markets and lack of coordination between markets. These conditions would lead to Keynesian unemployment in the short run, if not in the long run. This would be cured by the implementation of Keynesian monetary and fiscal policies.In their analysis and models, New Keynesians also accepted the Rational Expectations Hypothesis of the New Classicals, which meant that all decision makers, including workers, could estimate future price increases and other future conditions correctly.According to the Hysteresis Models, when economy comes to unemployment equilibrium (UNE) once, due to several factors it cannot restore to automatic natural rate of employment equilibrium (ANRUE). In brief, as most of New Classicals agree, these models do not accept automatic NRU balance in the LR. They are also called as “Super-Keynesian” models. As is seen, there are several New Keynesian models determining and explaining inflexibilities that stem from IC in prices and wages, lack of coordination etc. For example, even Mankiw and Romer‟s selection among these models consists of 2 volumes (880 pages in total).Keywords-New Keynesian Economics, New Keynesian Models, Hysteresis Models, Membership Model, Insider-Outsider Model, Capital Scrapping, The Change of Capital, Employment Duration.