The second half of the 20th century was an exciting time for Economics, with developments rapidly succeeding each other as a reaction to the very different economic scenarios the world faced. This development did nothing if not speed up towards the end of the century, when different theories not only succeeded each other, but often coexisted, feeding off the breakthroughs that were being made by the different schools. In this way, the end of the century was curiously reminiscent of the first half, with a return to the two main schools and a whole new focus on maths.
We start by looking at New Classical Macroeconomics. Traditionally, macroeconomics had been the realm of the Keynesians, whereas classical precepts had traditionally been applied to microeconomics and aggregated to have a shot at macro. NCM takes and applies this basis to develop a clear and coherent set of principles that aim to explain the major players, unemployment and inflation, from a fully neoclassical perspective.
Main definitions and economists:
–New Classical Macroeconomics, as a development of monetarism and the comeback of neoclassical economics;
–Robert Lucas, who is considered as the core of this doctrine;
–Thomas Sargent, whose works on the application of rational expectations to analyse monetary policies are of paramount importance;
–Rational expectations, the foundations on which NCM is built.
Employment and inflation:
–Phillips curve: NCM’s view, or what is the result when rational expectations are used in the expectations-augmented Phillips curve;
–Natural rate of unemployment, which differ in a very subtle way from the NAIRU measure;
–Business cycles are greatly analysed by NCM’s economists;
–Cahuc’s adjustment costs model helps understand how the labour market works from the NCM’s point of view.