He has a very good, instructive piece up that's helpful. It's always a bit complicated discussing 'traditional Keynesian' vs. New Keynesian econ as there are a few different levels we can compare. It seems to me in economics there is two dimensions: theory and policy.
On the theory level it seems that there is a lot more between TK and NK then for policy. To be sure many heterodox critics accuse the NKers of being Keynesians in name only-and when you look at people like Greg Mankiw not to mention John Taylor it would seem there's a good deal of truth in this.
http://diaryofarepublicanhater.blogspot.com/2014/07/thomas-palley-vs-paul-krugman-and-new.html
In the link above, I actually considered someone in Palley who is less a heterodox guy than what is within mainstream Macro rather derisively called a 'Paleo-Keynesian.' This is why discussing 'Keynesianism' can be quite tricky-what is called Paleo-or what WL calls Traditional Keynesianism-is considered by Post Keynesian types going back to Joan Robinson to be 'bastard Keynesianism.'
For the PK school, Keynesianism goes off track with Paul Samuelson and John Hicks. When Palley claims that what is called New Keynesianism could more accurately be called New Monetarism-of course it's now too late as Stephen Williamson claimed this moniker-he seems to be correct if you listen to Mankiw or read his 1991 essay that was in many way a founding document of NK.
It seems less cut and dried though when you read guys like Krugman, Delong, or WL. Are they just fake Keynesians. This comes back again to the discussion of theory and method vs. policy and practice. Wren-Lewis himself recently has another interesting piece on method. He argued that contrary to what is widely thought, the rise of Rational Expectations and microfoundations is not an anti Keynesian move.
http://mainlymacro.blogspot.com/2014/07/methodological-seduction.html
Now whether or not WL is right or not I'll put to one side for now. He impresses me as a smart guy and his arguments are always compelling whether or not he's right. What you can say is that both post Keynesian types or Paleo Keynesian types like Palley would disagree as did those who led the New Classical revolution themselves-Lucas, Sargent, et. al.
After all, WL himself admits that they had certain ideological commitments: is it so hard to imagine that the models they gave rise to would be tainted by such commitments? Again, I'm not trying to answer this question conclusively here but I think it's inevitable that it must be posed.
In any case, this piece on New Keynesian vs. what WL calls Traditional Keynesian is certainly very worth the read. What you come away with is that the differences between the school are not so wide-at least on matters of policy. Here is how he starts:
"There seems to be a bit of confusion about fiscal stimulus. I think most people understand what is going on in undergraduate textbook models, but some seem less sure of what might be different in more modern New Keynesian models. This seems to revolve around three issues:
http://mainlymacro.blogspot.com/2014/07/understanding-fiscal-stimulus-can-be.html#comment-form
I find the fact that he doesn't cover number 3 rather disappointing in view of how much heavy weather Scott Sumner makes of it. I mean this is the question that never seems to get answered. Sumner has is answers that I don't find compelling-monetary offset, and public debt-why worry about public debt in the middle of a recession with such low interest rates: isn't this the perfect time to do it?
Back to WL:
First, a difference that does not matter much for (1) and (2). The most basic NK model assumes the labour market clears, while the TK model does not. I tried to explain why that was not critical here.
That's not at all intuitive for me that the labor clearing assumption is not important here-which doesn't make it wrong-after all, intuitiveness doesn't proof truth though it can suggest it. I'll have to read his link there to understand it better.
"Nick Rowe sets up a slightly different problem, where there is a wedge shaped gap to fill. In that case government spending can initially rise, but then gradually fall back, filling the wedge. Same logic. Nick says that a policy that would work equally well in theory is to initially leave government spending unchanged, but then let it gradually fall, so that it ends up permanently lower. This is not nearly as paradoxical as Nick suggests. By lowering government spending in the long run, taxes will be lower in the long run. Consumers respond by raising consumption now and forever, so it is consumption that fills the gap. It works in theory, but may not in practice because consumers cannot be certain government spending will be lower forever. It is also an odd experiment that combines demand stabilisation with permanently changing the size of the state. So much simpler to do the obvious thing, and raise government spending to fill the demand gap. As fiscal stimulus in a liquidity trap does not require fine tuning, implementation lags are unlikely to be critical."
On the theory level it seems that there is a lot more between TK and NK then for policy. To be sure many heterodox critics accuse the NKers of being Keynesians in name only-and when you look at people like Greg Mankiw not to mention John Taylor it would seem there's a good deal of truth in this.
http://diaryofarepublicanhater.blogspot.com/2014/07/thomas-palley-vs-paul-krugman-and-new.html
In the link above, I actually considered someone in Palley who is less a heterodox guy than what is within mainstream Macro rather derisively called a 'Paleo-Keynesian.' This is why discussing 'Keynesianism' can be quite tricky-what is called Paleo-or what WL calls Traditional Keynesianism-is considered by Post Keynesian types going back to Joan Robinson to be 'bastard Keynesianism.'
For the PK school, Keynesianism goes off track with Paul Samuelson and John Hicks. When Palley claims that what is called New Keynesianism could more accurately be called New Monetarism-of course it's now too late as Stephen Williamson claimed this moniker-he seems to be correct if you listen to Mankiw or read his 1991 essay that was in many way a founding document of NK.
It seems less cut and dried though when you read guys like Krugman, Delong, or WL. Are they just fake Keynesians. This comes back again to the discussion of theory and method vs. policy and practice. Wren-Lewis himself recently has another interesting piece on method. He argued that contrary to what is widely thought, the rise of Rational Expectations and microfoundations is not an anti Keynesian move.
http://mainlymacro.blogspot.com/2014/07/methodological-seduction.html
Now whether or not WL is right or not I'll put to one side for now. He impresses me as a smart guy and his arguments are always compelling whether or not he's right. What you can say is that both post Keynesian types or Paleo Keynesian types like Palley would disagree as did those who led the New Classical revolution themselves-Lucas, Sargent, et. al.
After all, WL himself admits that they had certain ideological commitments: is it so hard to imagine that the models they gave rise to would be tainted by such commitments? Again, I'm not trying to answer this question conclusively here but I think it's inevitable that it must be posed.
In any case, this piece on New Keynesian vs. what WL calls Traditional Keynesian is certainly very worth the read. What you come away with is that the differences between the school are not so wide-at least on matters of policy. Here is how he starts:
"There seems to be a bit of confusion about fiscal stimulus. I think most people understand what is going on in undergraduate textbook models, but some seem less sure of what might be different in more modern New Keynesian models. This seems to revolve around three issues:
"1) In Traditional Keynesian (TK) models any fiscal giveaway seems to work, whereas in New Keynesian (NK) analysis the type of fiscal policy seems to matter much more."
"2) Is the dynamics of how policy works different in TK and NK models?"
"3) In TK models fiscal and monetary policy seem interchangeable, but NK models imply fiscal policy is a second best tool. Why is that?
"In this post I will just cover the first two issues."
http://mainlymacro.blogspot.com/2014/07/understanding-fiscal-stimulus-can-be.html#comment-form
I find the fact that he doesn't cover number 3 rather disappointing in view of how much heavy weather Scott Sumner makes of it. I mean this is the question that never seems to get answered. Sumner has is answers that I don't find compelling-monetary offset, and public debt-why worry about public debt in the middle of a recession with such low interest rates: isn't this the perfect time to do it?
Back to WL:
First, a difference that does not matter much for (1) and (2). The most basic NK model assumes the labour market clears, while the TK model does not. I tried to explain why that was not critical here.
"The difference that really matters is consumption. In TK models consumption just depends on current post tax income, while in the most basic NK model consumption depends on expectations of discounted future income, and expectations are rational. This makes NK models dynamic, whereas in the textbook TK model we do not need to worry about what happens next."
"This immediately gives us the best known difference between NK and TK: Ricardian Equivalence. A tax cut today to be financed by tax increases in the future leaves discounted labour income unchanged, and so consumption remains unchanged. However this is only a statement about tax changes. Changes in government spending have much the same impact as they do in TK models."
That's not at all intuitive for me that the labor clearing assumption is not important here-which doesn't make it wrong-after all, intuitiveness doesn't proof truth though it can suggest it. I'll have to read his link there to understand it better.
"Nick Rowe sets up a slightly different problem, where there is a wedge shaped gap to fill. In that case government spending can initially rise, but then gradually fall back, filling the wedge. Same logic. Nick says that a policy that would work equally well in theory is to initially leave government spending unchanged, but then let it gradually fall, so that it ends up permanently lower. This is not nearly as paradoxical as Nick suggests. By lowering government spending in the long run, taxes will be lower in the long run. Consumers respond by raising consumption now and forever, so it is consumption that fills the gap. It works in theory, but may not in practice because consumers cannot be certain government spending will be lower forever. It is also an odd experiment that combines demand stabilisation with permanently changing the size of the state. So much simpler to do the obvious thing, and raise government spending to fill the demand gap. As fiscal stimulus in a liquidity trap does not require fine tuning, implementation lags are unlikely to be critical."
"So if we restrict ourselves to fiscal changes that just involve changing the timing of government spending, fiscal demand management in NK models works in much the same way as in TK models, which is simple and intuitive. It really is just a matter of filling the gap."
So on the matter of policy rather than theory NK and TK work pretty much the same! Why then all the confusions? Also by leaving out number 3-why NK prefers monetary policy when not at the lower bound he doesn't even touch Sumner's Hornet's Nest which is very unfortunate.
So good piece but the confusion is likely not going to be over-maybe someone can convince WL to do a follow up on number 3-if he thinks that's uninteresting, he's mistaken. He wrote the piece hoping to clear up the confusion but to do this fully he needs to tackle number 3.
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