MACROECONOMIC THEORY – A DYNAMIC GENERAL EQUILIBRIUM APPROACH, M.R. Wickens, Princeton University Press, Princeton, 2008, 496 pages (hardback), ISBN 0691116407
Economic Analysis and Policy, 2010, vol. 40, issue 1, 131-132
Dynamic general equilibrium modelling is considered as the standard approach in modern macroeconomics. Kydland and Prescott (1982) became famous for their pioneering role in the (neoclassical) real business cycle theory and as such in establishing dynamic general equilibrium modelling in macroeconomic theory. At its core, the approach applies Walrasian general equilibrium theory to aggregate economic phenomena. Being completely microfounded, models that are based on this approach are shielded from the Lucas critique. Soon, New Keynesian macroeconomists Rotemberg and Woodford (1997) took the opportunity and added Keynesian features to the model, thereby putting Keynesian theory on a more solid ground and protecting it against accusations of being ‘ad hoc’. As a result, both the neoclassical and the New Keynesian school of thought are nowadays using the dynamic general equilibrium framework as their workhorses.
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