Finance in macroeconomics in the post-war years: the Neoclassical Synthesis

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Chapter 7 in Banks and Finance in Modern Macroeconomics, 2019, pp 140-179 from Edward Elgar Publishing

Abstract: In the 1950s and 1960s, two parallel processes went on, both of which had consequences: the stabilization of the general-equilibrium theory in the Arrow-Debreu model; and the stabilization of a comprehensive macroeconomic theory aimed at encompassing both the neoclassical micro-foundations and the explanation of Keynesian unemployment in the short term. The idea of building macroeconomic theory on general equilibrium foundations inspired all scholars who contributed to the ‘neoclassical synthesis’, notably Patinkin, Modigliani and Tobin. Since the mid-1950s the set of assumptions made by Patinkin and Modigliani substantially eliminated banks and the inside financial structure of the economy from benchmark macroeconomic models. Along an alternative path, the innovative approach to money and finance proposed by Gurley and Shaw significantly influenced Tobin and his attempt to introduce financial markets into a general-equilibrium framework. The chapter closes by examining why Tobin’s line of research remained marginal in the later development of macroeconomics.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2019
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