Chapter 16
The New Keynesian
Macroeconomic Theory
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10
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40
90 91 92 93 94 95 96 97 98 99 00
Main Idea
? Nominal Rigidity
?nominal price rigidity
?nominal wage rigidity
? Real Rigidity
?Real price rigidity
?Real wage rigidity
? Unemployment,Economic Cycle and Policy
Suggestion
16.1 Nominal Rigidity
?The origin of new Keynesian
macroeconomic theory
?Parkin first puts forward,new Keynesian theory” in
1984 。
? the economists include Mankiw,Blanchard、
Fischer,David · Romer 。 Because all these
economists live near the coast, people often call
them,sea” economists。
16.1 Nominal Rigidity
? The character of new Keynesian theory,
?Accept the,rational expectation” assumption of neoclassicism,
build models which include wage and price rigidity。
?To use all kinds of real economic faultiness（ for example,
incomplete competition,incomplete market,asymmetric
information） to explain economic fluctuation。
?Because of price rigidity, money isn’t neutral。
16.1 Nominal Rigidity
?nominal rigidity,
?The level of nominal price or nominal
wage can not be fully adjusted。
?nominal price rigidity
?nominal wage rigidity
16.1 Nominal Rigidity
? nominal price rigidity
?Market includes fixed price market and flexible price market,
Fixed price market includes labor market and commodity market；
and flexible price market includes finance market and small
commodity market,Because there is no auctioneer in labor
market,to frequently change wage will raise the cost of trade,
So it is not the best choice for a rational person,and the exist of
long term contract proves its advantage。
16.1 Nominal Rigidity
P
P0
P1
Y1 Y O Yn
SAS(W0)
LAS
SAS(W1)
AD1
AD0
A
B
C
16.1 Nominal Rigidity
?Nominal Price Rigidity
?disadvantage,
?The theory deduces a conclusion that real wage is reverse to
the economic prosperity, but this conclusion doesn’t match
with the real world。
16.1 Nominal Rigidity
? Nominal Price Rigidity
?Menu cost
? Mankiw first puts forward this idea。
? The menu cost results in the obstacle for price adjustment
? It includes not only the real cost of the adjustment price（ for
example,the expenses of printing the new quotation and the
catalogue) but also the time cost such as negotiation;
? Near rationality;
? In incompletely competitive market,if a firm,owning the price-
decision power,doesn’t make the best choice in the process of
deciding price,this action will produce the cost,This cost,however,
may be very little,so the firm’s inertia-price-decision behavior can
be called,near rationality”,
16.1 Nominal Rigidity
——near rationality
P P0 P1
A
B C
π
π0
π1 π
2
The
impact of
demand
the best profits
in Changing price
orders
the constant profits
in Maintaining price
orders
π1-π2 is small,not change price is
considered near rational
16.1 Nominal Rigidity
? From the aspect of connecting menu cost and
near rationality,if,using Cm to denote menu
cost,Cm>π1-π2,it will be the completely
rational choice for the firm not to adjust the price,
? No matter nominal wage rigidity or nominal price
rigidity,its presence shows that the government
can use the policy to offset the impact produced
by demand on yield,
16.2 Real Rigidity
?Real Rigidity,
?Economic agent lacks incentives to change real wage
or real price of the goods,When the change of demand
takes place,agent will not adjust her price but
productive quantity to match the change,
?real price rigidity
?real wage rigidity
16.2 Real Rigidity
? Different Explanations to real price rigidity,
?Exteriority of the market
?Exist of searching cost
?The asymmetric information of the capital market
?The asymmetric information of the product market
16.2 Real Rigidity
? Different Explanations to real price rigidity,
?Incompletely competitive
?The power of labor union is too big
?Exist of labor force fluxion cost
?Asymmetric information
?Adverse selection
?Moral hazard
16.2 Real Rigidity
? Efficiency Wage Model（ solow,1979）
?The production function of the firm
? A solow residua, L labor number, e Diligent degree
?The target function of the firm is to maximize
profits π,
0)w(e],L)w(e[AFQ ???
wL]L)w(e[AF ???
16.2 Real Rigidity
? The firm can maximize its profits by
encouraging workers’ effort through the
efficient wage w*,According to FOC,the
Solow-condition is
w
)w(e
)w(e ??
16.2 Real Rigidity
e
e*
o w*
Wage e curve e(w)
w
A
Point A means
Solow
condition,
16.2 Real Rigidity
? Firm firstly chooses the optimal wage w*,then decides the quantity of labor
force,When the efficient wage is higher than the wage under the perfect
information,the number of labor force hired by firms in the equilibrium level
will be less than the number in the condition of complete competition,So
this gives an explanation to the involuntary unemployment,
0 L1 L
w
L2 Ls
w*
SL
DL1
DL2
U
involuntary
unemployment
16.3 Unemployment,Economic
Cycle and Policy Suggestion
? unemployment
?NAIRU
?Under the monopolistic competition of labor market and
product market,NAIRU can be get by equating the real
wage wished by workers to the real wage decided by the
firm according to the productive efficiency and cost make-
up,
?NAIRU depends on the contrast between workers’ power
and firms’ power,
16.3 Unemployment,Economic
Cycle and Policy Suggestion
? unemployment
? Lag theory
? Describe the relationship between NAIRU and real
unemployment rate,
Then, UNt Means NAIRU at t period,Ut-1 means the actual
unemployment rate of the last period,We can see that the
change of real unemployment will cause the change of
NAIRU,
1a0),UU(aUU 1Nt1t1NtNt ????? ???
16.3 Unemployment,Economic
Cycle and Policy Suggestion
? The attitude to economic cycle theory
? Admit that the facts of either demand or supply will produce impact on
the whole economy；
? Pay more attention to the obstacles of real economy rather than on the
side of demand or supply；
? The activity of price adjustment will become the cause of economic
fluctuation；
? Explain many styled facts of economic cycle,
? Employment, consume,investment and government expenditure are the same side
with cycle；
? Real wage maybe the same side with cycle or not,
16.3 Unemployment,Economic
Cycle and Policy Suggestion
? policy suggestion,
? Money is not neutral,we can use monetary policy to counteract the
effects produced by nominal rigidity ；
? The solution to involuntary unemployment,
? Soft the employment guarantees to low the cost of hiring or firing
workers;
? Improve the relationship between employments and employers to
low the possibility of strike occurring；
? Reduce the distortion of unemployment benefit system to the
unemployment
? Encourage firms to adopt more flexible sharing system；
Chapter 16
The End
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
The New Keynesian
Macroeconomic Theory
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
Main Idea
? Nominal Rigidity
?nominal price rigidity
?nominal wage rigidity
? Real Rigidity
?Real price rigidity
?Real wage rigidity
? Unemployment,Economic Cycle and Policy
Suggestion
16.1 Nominal Rigidity
?The origin of new Keynesian
macroeconomic theory
?Parkin first puts forward,new Keynesian theory” in
1984 。
? the economists include Mankiw,Blanchard、
Fischer,David · Romer 。 Because all these
economists live near the coast, people often call
them,sea” economists。
16.1 Nominal Rigidity
? The character of new Keynesian theory,
?Accept the,rational expectation” assumption of neoclassicism,
build models which include wage and price rigidity。
?To use all kinds of real economic faultiness（ for example,
incomplete competition,incomplete market,asymmetric
information） to explain economic fluctuation。
?Because of price rigidity, money isn’t neutral。
16.1 Nominal Rigidity
?nominal rigidity,
?The level of nominal price or nominal
wage can not be fully adjusted。
?nominal price rigidity
?nominal wage rigidity
16.1 Nominal Rigidity
? nominal price rigidity
?Market includes fixed price market and flexible price market,
Fixed price market includes labor market and commodity market；
and flexible price market includes finance market and small
commodity market,Because there is no auctioneer in labor
market,to frequently change wage will raise the cost of trade,
So it is not the best choice for a rational person,and the exist of
long term contract proves its advantage。
16.1 Nominal Rigidity
P
P0
P1
Y1 Y O Yn
SAS(W0)
LAS
SAS(W1)
AD1
AD0
A
B
C
16.1 Nominal Rigidity
?Nominal Price Rigidity
?disadvantage,
?The theory deduces a conclusion that real wage is reverse to
the economic prosperity, but this conclusion doesn’t match
with the real world。
16.1 Nominal Rigidity
? Nominal Price Rigidity
?Menu cost
? Mankiw first puts forward this idea。
? The menu cost results in the obstacle for price adjustment
? It includes not only the real cost of the adjustment price（ for
example,the expenses of printing the new quotation and the
catalogue) but also the time cost such as negotiation;
? Near rationality;
? In incompletely competitive market,if a firm,owning the price-
decision power,doesn’t make the best choice in the process of
deciding price,this action will produce the cost,This cost,however,
may be very little,so the firm’s inertia-price-decision behavior can
be called,near rationality”,
16.1 Nominal Rigidity
——near rationality
P P0 P1
A
B C
π
π0
π1 π
2
The
impact of
demand
the best profits
in Changing price
orders
the constant profits
in Maintaining price
orders
π1-π2 is small,not change price is
considered near rational
16.1 Nominal Rigidity
? From the aspect of connecting menu cost and
near rationality,if,using Cm to denote menu
cost,Cm>π1-π2,it will be the completely
rational choice for the firm not to adjust the price,
? No matter nominal wage rigidity or nominal price
rigidity,its presence shows that the government
can use the policy to offset the impact produced
by demand on yield,
16.2 Real Rigidity
?Real Rigidity,
?Economic agent lacks incentives to change real wage
or real price of the goods,When the change of demand
takes place,agent will not adjust her price but
productive quantity to match the change,
?real price rigidity
?real wage rigidity
16.2 Real Rigidity
? Different Explanations to real price rigidity,
?Exteriority of the market
?Exist of searching cost
?The asymmetric information of the capital market
?The asymmetric information of the product market
16.2 Real Rigidity
? Different Explanations to real price rigidity,
?Incompletely competitive
?The power of labor union is too big
?Exist of labor force fluxion cost
?Asymmetric information
?Adverse selection
?Moral hazard
16.2 Real Rigidity
? Efficiency Wage Model（ solow,1979）
?The production function of the firm
? A solow residua, L labor number, e Diligent degree
?The target function of the firm is to maximize
profits π,
0)w(e],L)w(e[AFQ ???
wL]L)w(e[AF ???
16.2 Real Rigidity
? The firm can maximize its profits by
encouraging workers’ effort through the
efficient wage w*,According to FOC,the
Solow-condition is
w
)w(e
)w(e ??
16.2 Real Rigidity
e
e*
o w*
Wage e curve e(w)
w
A
Point A means
Solow
condition,
16.2 Real Rigidity
? Firm firstly chooses the optimal wage w*,then decides the quantity of labor
force,When the efficient wage is higher than the wage under the perfect
information,the number of labor force hired by firms in the equilibrium level
will be less than the number in the condition of complete competition,So
this gives an explanation to the involuntary unemployment,
0 L1 L
w
L2 Ls
w*
SL
DL1
DL2
U
involuntary
unemployment
16.3 Unemployment,Economic
Cycle and Policy Suggestion
? unemployment
?NAIRU
?Under the monopolistic competition of labor market and
product market,NAIRU can be get by equating the real
wage wished by workers to the real wage decided by the
firm according to the productive efficiency and cost make-
up,
?NAIRU depends on the contrast between workers’ power
and firms’ power,
16.3 Unemployment,Economic
Cycle and Policy Suggestion
? unemployment
? Lag theory
? Describe the relationship between NAIRU and real
unemployment rate,
Then, UNt Means NAIRU at t period,Ut-1 means the actual
unemployment rate of the last period,We can see that the
change of real unemployment will cause the change of
NAIRU,
1a0),UU(aUU 1Nt1t1NtNt ????? ???
16.3 Unemployment,Economic
Cycle and Policy Suggestion
? The attitude to economic cycle theory
? Admit that the facts of either demand or supply will produce impact on
the whole economy；
? Pay more attention to the obstacles of real economy rather than on the
side of demand or supply；
? The activity of price adjustment will become the cause of economic
fluctuation；
? Explain many styled facts of economic cycle,
? Employment, consume,investment and government expenditure are the same side
with cycle；
? Real wage maybe the same side with cycle or not,
16.3 Unemployment,Economic
Cycle and Policy Suggestion
? policy suggestion,
? Money is not neutral,we can use monetary policy to counteract the
effects produced by nominal rigidity ；
? The solution to involuntary unemployment,
? Soft the employment guarantees to low the cost of hiring or firing
workers;
? Improve the relationship between employments and employers to
low the possibility of strike occurring；
? Reduce the distortion of unemployment benefit system to the
unemployment
? Encourage firms to adopt more flexible sharing system；
Chapter 16
The End
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
