Keynesians
Classical: Real Business Cycle model
Classical: misperceptions model
Assumptions
Wages / prices rigid
Wages / prices flexible
Main source of shocks
Demand shocks (to less extend supply shocks)
Mainly supply shocks; possibly real demand shock (changes in G)
Monetary shocks are also possible; if unexpected
Model
FE
Demand does not have to be equal to potential output
Demand is equal to potential output
AD
Similar “graph” to keynesians; but the underlying model is differnet; also adjustment to equilibrium is faster
Supply:
Labor market
Disequilibrium (rigid nominal wages; efficiency wage theory)
Clears (but frictional unemployment bigger in recessions)
Clears
Policy advice:
Should govt. try to smooth business cycles?
Yes
No (will make workers poorer)
No
Fit the facts?
Pro-cyclical employment: yes
Pro-cyclical wages: no
Pro-cyclical labor productivity: no
Non-neutrality of money: yes
Inflation tends to be higher during booms: yes
Involuntary unemployment during recessions: yes
Pro-cyclical wages: yes
Pro-cyclical labor productivity: yes
Non-neutrality of money: no
Inflation higher during booms: no
Involuntary unemployment during recessions: yes - frictional
pela_191