Wednesday, October 9, 2013

Keynes, Old Keynesians, New Keynesians, New Normal

Why Keynes wouldn’t have too rosy a view of our economic future: "The technical term for this sickness is the output gap, or the gap between what we could be producing and what we are producing. It’s been remarkably constant through the “recovery.” As Neil Irwin wrote earlier this year, professional projections from the Federal Reserve have argued for several years now that a recovery — in which the economy closes this output gap and job growth soars — is just around the corner. And as of this year, they’re still insisting a turnaround is imminent. Once again they are saying that economy is weak right now, but it’ll close the gap in a year or two. But what if the gap never closes? What if it could stay on this parallel track forever? The answer matters. It matters for how, or whether, the Great Recession will end. Thus it matters for government policy. But it also matters because this question has historically been one of the most contentious in economic theory. It is what separates John Maynard Keynes from his predecessors, and it is what separates “Old Keynesians” from “New Keynesians.”"

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