John Cochrane has been going after the New Keynesian model. The other day, he linked to a paper by Bill Dupor and Rong Li. They argue that the stimulus did not increase expected inflation, which is a channel by which fiscal policy is supposed to create an expansion in the New Keynesian model.
My question is whether anyone really believes the New Keynesian model. I know that for twenty years, it’s what every graduate student was taught. I know that everyone thinks that writing down a dynamic optimization problem counts as microfoundations.
But when it comes to interpreting the stimulus, my sense is that most economists revert to the old Keynesian model. If they believed the New Keynesian model, I think they would be using the language of intertemporal substitution and expectations more frequently. Instead, what I keep reading is more along the lines of spending creates jobs and jobs create spending.
Arnold, I think you’re right. One example: I recall reading, early in the stimulus debate, sometime between December 2008 and February 2009, that Alan Blinder used the crudest Keynesian model, the C + I + G Keynesian Cross model, to show a reporter what the size of the stimulus should be. I can’t find the cite, though.
David,
I, too, recall that effort by Blinder to employ the Keynesian cross in a way that I suspect even Paul Samuelson would have disapproved of. Also like you, my (very cursory) Google search produced no evidence. Perhaps you and I are suffering the same delusion simultaneously.