The New Classical Macroeconomics and Stabilization Policy
The new classical macroeconomics (NCM) is not particularly useful in explaining stark episodes. To be successful, the new classical approach will have to be developed in a number of areas including coordination problems and political economy issues of stabilization. These modifications can in principle be worked into the NCM classical approach, but that will change the main thrust. So far, the message reads: markets clear, productivity shocks are the dominant source of fluctuations, intertemporal substitution in consumption and labor supply are the chief amplifying factors, and government policy is substantially irrelevant. On these key propositions, the evidence fails and the emphasis is misdirected. The issue is not whether markets work, but rather how they work, a concern rightly emphasized by the new Keynesian economics.
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