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Cambridge Journal of Economics Advance Access originally published online on April 4, 2005
Cambridge Journal of Economics 2005 29(5):747-767; doi:10.1093/cje/bei039
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© The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

The ‘modern’ view of macroeconomics: some critical reflections

Alfonso Palacio-Vera*

* Universidad Complutense de Madrid, Spain

Address for correspondence: Alfonso Palacio-Vera, Universidad Complutense de Madrid, Departamento de Economía Aplicada III, Facultad de Ciencias Económicas y Empresariales, Campus de Somosaguas, Madrid 28223, Spain; email: apv{at}ccee.ucm.es

David Romer has proposed a new basic macroeconomic framework: the IS–MP–IA model. Its proponents claim that it represents the ‘modern’ view of macroeconomics. We show that the new framework remains closely attached to the neoclassical synthesis and, in addition, does not take account of: (i) the empirical evidence on the output–inflation trade-off; (ii) the evidence on the interdependence of aggregate demand and supply; (iii) the institutional limits of monetary policy; and (iv) the implications for macroeconomic policy of (i), (ii) and (iii). Once these aspects have been incorporated, short-run stabilisation policy is not neutral in the long run, the notion of a ‘natural’ rate of interest becomes untenable and aggregate demand turns into the crucial exogenous variable.

Key Words: Neutrality of money • NAIRU • Natural rate of interest • Aggregate demand

JEL classifications: A22, E10, E50, E60

Manuscript received November 25, 2002; final version received March 5, 2004.


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