New Keynesian economics is an economic theory that seeks to explain short-run economic fluctuations, particularly during recessions, with a focus on imperfections and frictions in the labor and goods markets. It is an extension of the original Keynesian economics developed by John Maynard Keynes, but incorporates more contemporary economic theories and ideas.
In the framework of New Keynesian economics, one of the central assumptions is the presence of nominal rigidities, meaning that wages and prices do not adjust instantaneously to changes in supply and demand. This leads to sticky prices, where firms are unable to adjust prices immediately to match changes in market conditions or the macroeconomic environment.
Additionally, New Keynesians emphasize the importance of microfoundations, which means analyzing macroeconomic phenomena based on the behavior of individual agents such as households and firms. They argue that these individual behaviors and decisions can help explain aggregate outcomes in the economy.
Another key aspect of New Keynesian economics is an emphasis on market imperfections and the role of institutions. These imperfections include market power, information asymmetry, and incomplete contracts, among others. These imperfections can lead to market failures and therefore a need for government intervention to achieve better economic outcomes.
Overall, New Keynesian economics aims to provide a more robust theoretical framework to explain fluctuations in economic activity, unemployment, inflation, and the role of fiscal and monetary policy in stabilizing the economy.
