The Return of (New) Keynesian Economics

The period from the mid-1960s to the mid-1980s is characterised by a slowdown in the level of economic activity; however, government’s stabilisation and welfare functions restrained the outbreak of a major depression and converted it to a long-lasting stagflation. This is the reason why this time period has been christened the “Silent Depression” and, as in the 1930s, it formed the fertile ground for the flourishing of new economic theories and for the withering away of the old ones. Dissatisfaction with the neoclassical synthesis as well as the dead end road of disequilibrium macroeconomics paved the way for the rise of Monetarism, which, however, soon lost its popularity, and already from the mid-1970s, the researches of New Classical economists with the works of Lucas and Sargent were leading the way. Many among the New Classical economists kept a critical stance towards basic propositions of their theory, and in the early 1980s, it led to the development of the real business cycles (RBC) approach. Meanwhile, Keynesian economists of the neoclassical synthesis (Tobin, Modigliani and Gordon) continued their critique which was initially levelled against Monetarism and subsequently against the New Classical economics and the RBC. The basic plea of New Keynesians is about the fundamental common hypothesis of all these approaches which is continuous market clearing. These new, so to speak, Keynesian economists argued that in actual economies there are many “obstacles” that hinder markets from complete clearing.