Mr. Keynes and the “Classics”; A Suggested Reinterpretation

Gauti Eggertsson and Cosimo Petracchi ()

No 29158, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper revisits and proposes a resolution to an empirical and theoretical controversy between Keynes and the “classics” (or monetarists). The controversy dates to Keynes’s General Theory (1936)—most famously formalized in Hicks’s (1937) classic Econometrica article, in which the IS-LM model is first formally stated. We first replicate empirical tests formulated in the late 1960s and ’70s and show that more recent data have more statistical power and resolve the empirical debate in favor of the Keynesians, at least according to the criteria of the literature at that time. We then show, using a simple dynamic stochastic general equilibrium (DSGE) model, that the empirical tests suffer from the Lucas (1976) critique, as the conclusion fundamentally depends upon the assumed policy regime. Nevertheless, we argue, this new empirical result is useful: it provides evidence for the existence of a “Keynesian policy regime” according to which traditional monetary expansion loses its impact in the absence of a policy regime change, in the sense of Sargent (1982).

JEL-codes: B0 B1 B22 E0 E12 E13 E4 E5 E50 E51 E52 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-his, nep-hpe, nep-isf, nep-mac, nep-ore and nep-pke
Note: ME
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.nber.org/papers/w29158.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:29158

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w29158

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().