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Price Level Stabilization: Hayek and New Keynesians

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  • Pavel Potuzak

    (University of Economics, Prague)

Abstract

The doctrine of price level stabilization is one of the most important building blocks in modern macroeconomics. In 1920s and 1930s, Friedrich August von Hayek presented a theory that challenged this monetary-policy regime. Hayek stressed that attempts to stabilize the price level in the situation of a growing natural output might cause serious injection effects leading the economy to a boom-bust cycle. This article compares the Hayek theory with the New Keynesian doctrines. A simple graphical model is used to elucidate differences between the two theories. It is suggested that a declining price level might be a normal response of the price system in the expanding economy because the New Keynesian arguments stressing price rigidities may be of lower significance when the deflation in prices is caused by technological progress.

Suggested Citation

  • Pavel Potuzak, 2014. "Price Level Stabilization: Hayek and New Keynesians," Proceedings of International Academic Conferences 0902921, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:0902921
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    More about this item

    Keywords

    Price level stabilization; business cycle; natural rate of interest;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • B25 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Historical; Institutional; Evolutionary; Austrian; Stockholm School
    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian

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