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Natural rates in the New Synthesis: Same old trouble?

Author

Listed:
  • Hans-Michael Trautwein

    (Carl von Ossietzky University Oldenburg, Germany)

  • Abdallah Zouache

    (CREUSET - CNRS, Universit Jean Monnet, Saint Etienne, France)

Abstract

This paper evaluates the concepts of natural rates of interest and output in Woodford's "neo-Wicksellian" and "benchmark New Keynesian" version of the New Neoclassical Synthesis (NNS) by comparing them with the original approach of Wicksell and critical assessments and adaptations by Lindahl, Myrdal, Keynes and Friedman. It is shown that the theoretical foundations of the NNS prescriptions for monetary policy are ambiguous and incomplete. Using the NNS definition(s) of the natural rate of output, New Keynesian policy rules do not necessarily yield results superior to those of "Old Keynesian" strategies of output stabilization. Moreover, natural rates of interest can hardly be defined independently of the influences of monetary policy. The use of natural-rate concepts in the NNS disregards essential problems that were identified in the older Wicksellian and Keynesian literature.

Suggested Citation

  • Hans-Michael Trautwein & Abdallah Zouache, 2009. "Natural rates in the New Synthesis: Same old trouble?," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 6(2), pages 207-225.
    • Handle: RePEc:elg:ejeepi:v:6:y:2009:i:2:p:207-225
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    Citations

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    Cited by:

    1. Ronny Mazzocchi, 2013. "Scope and Flaws of the New Neoclassical Synthesis," DEM Discussion Papers 2013/13, Department of Economics and Management.
    2. Ronny Mazzocchi, 2013. "Monetary Policy when the NAIRI is unknown: The Fed and the Great Deviation," DEM Discussion Papers 2013/16, Department of Economics and Management.
    3. Gobbi, Lucio & Mazzocchi, Ronny & Tamborini, Roberto, 2019. "Monetary policy, de-anchoring of inflation expectations, and the “new normal”," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    4. Colombier, Carsten, 2011. "Konjunktur und Wachstum [Business cycles fluctuations and long-term growth]," MPRA Paper 104739, University Library of Munich, Germany.
    5. Ronny Mazzocchi, 2013. "Investment-Saving Imbalances with Endogenous Capital Stock," DEM Discussion Papers 2013/14, Department of Economics and Management.
    6. July Radev, 2017. "Monetary policy and the dynamic disequilibrium," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 96-114.
    7. Alexander Tobon & Nicolas Barbaroux, 2015. "Credit and Prices in Woodford's New Neoclassical Synthesis," Economic Thought, World Economics Association, vol. 4(1), pages 21-46, March.

    More about this item

    Keywords

    natural rate; output gaps; interest-rate gaps; Wicksellian theory;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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