Contemporary Macroeconomic Thought and Its Discontents

Mark Baimbridge and Philip Whyman

Chapter 3 in Crisis in the Eurozone, 2015, pp 40-54 from Palgrave Macmillan

Abstract: Abstract As discussed in Chapter 2, the New Classical School (NCS), developed in the context of stagflation in the 1970s, forms the bedrock of contemporary neoliberal economics by shifting the focus from the demand-side to the supply-side of the economy, a position that was previously not well developed. Thus, prevailing models were criticised, first, for not fully incorporating rational optimising behaviour of individual agents, leading to a new paradigm based on comprehensive adoption of market-clearing microeconomic foundations. Second, the assumptions and outcomes are that all economic agents are rational optimisers who base their decisions only on real factors and on the postulation that markets clear more or less continuously: these being the key pillars that support outcomes of the model. Third, that prices are correctly anticipated because of rational expectations; hence, there are no systematic errors in making price forecasts. This aggregate supply hypothesis explains how temporary fluctuations away from full employment may be possible. These fluctuations are said to have these results: that output and employment are determined in the labour market; that there is a unique natural rate of unemployment; that anticipated changes in the growth of the money supply lead directly to inflation; that they have no real effects; and that there is total crowding-out of fiscal policy.

Keywords: Interest Rate; Monetary Policy; Central Bank; Fiscal Policy; Government Expenditure (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-32903-5_3

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DOI: 10.1057/9781137329035_3

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