New Keynesian Economics, Nominal Rigidities and Involuntary Unemployment

Abstract

In this chapter, I seek to examine what the contribution of new Keynesian macroeconomics has been in the last 15 years and to consider the methodological lessons to be learned. I also want to outline what I believe to be the driving forces behind the innovations made. I would like to stress at the outset that this chapter is very much an expression of my own personal opinions and perspective rather than an attempt at scholarly objectivity. The new Keynesian umbrella has sheltered many different themes: financial market imperfections, coordination failures, endogenous growth, menu costs/staggered contracts, fiscal multipliers inter alia.¹ Here I wish to focus on two themes: nominal rigidities and involuntary unemployment. These have of course been part of the Keynesian approach since Keynes’ General Theory and remain a major theme in new Keynesian economics.

I would like to thank Roger Backhouse, Kevin Hoover, Andrea Salanti and Richard Lipsey for useful discussions. Shortcomings are solely my responsibility.