The "Modern" View of Macroeconomics: Somo Critical Reflections

Alfonso Palacio Vera
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Alfonso Palacio Vera: Departamento de Economía Aplicada, Pública y Política. Universidad Complutense de Madrid., https://www.ucm.es/eapp

No 02-17, Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales

Abstract: Romer has proposed an alternative macroeconomic framework, i.e., the IS-MP-IA model. Its proponents claim that it constitutes a ‘modern’ view of macroeconomics. We show that the new framework is closely attached to the neoclassical synthesis and, in addition, fails to take account of: (i) the recent empirical evidence on the short-run output-inflation trade-off, (ii) the recent work and evidence on the interdependence of aggregate demand and supply, (iii) the limits of monetary policy and (iv) the consequences for demand-management policy of (i), (ii) and (iii). Once all these aspects are incorporated, we have that short-run stabilization policy is non-neutral in the long run, loanable funds theory becomes irrelevant and aggregate demand becomes the crucial exogenous variable in the short run and, perhaps, also in the long run.

Keywords: Neutrality of money; NAIRU; Natural rate of interest; Aggregate demand. (search for similar items in EconPapers)
JEL-codes: A22 E10 E50 E60 (search for similar items in EconPapers)
Pages: 36 pages Creation-Date: 2002
New Economics Papers: this item is included in nep-his, nep-hpe and nep-pke
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