New Keynesian economics

New Keynesian economics is a macroeconomic tradition that explains business-cycle fluctuations using imperfect competition, nominal rigidities, and expectations. It provides microeconomic foundations for analyzing how monetary policy affects output and inflation.

New Keynesian Phillips curve: A relation in which inflation depends on expected future inflation and the output gap or real marginal cost. It expresses how staggered price adjustment turns economic slack into inflation dynamics.
Nominal rigidity: The resistance of nominal prices or wages to adjust promptly when economic conditions change. It is the central friction that allows monetary disturbances to affect real activity.
John Maynard Keynes: The British economist whose 1936 book The General Theory argued that deficient aggregate demand can sustain unemployment. New Keynesian economics inherits the focus on demand fluctuations while adding explicit microeconomic foundations.
Monetary policy: Central-bank actions that influence interest rates, credit conditions, and the supply of money. The model explains how interest-rate choices affect demand and inflation when prices adjust slowly.
Real business cycle theory: A macroeconomic theory that explains business cycles primarily through real shocks and optimizing responses in flexible-price markets. It contrasts with New Keynesian accounts that assign a central role to nominal rigidities.
Calvo pricing: A price-setting model in which firms face a fixed probability of being unable to reset prices each period. It gives the standard New Keynesian model a tractable form of nominal rigidity.
Monopolistic competition: A market structure in which firms sell differentiated products and have some control over their prices. Differentiated goods give firms discretion to set prices that may remain temporarily unchanged.
New classical macroeconomics: A macroeconomic tradition emphasizing rational expectations, market clearing, and the limits of systematic stabilization policy. Its challenge to older Keynesian models helped spur the search for rigorous models with nominal frictions.
Zero lower bound: A constraint that prevents nominal interest rates from falling substantially below zero. It exposes limits to conventional rate cuts when demand is weak and inflation is low.
Post-Keynesian economics: A diverse macroeconomic tradition emphasizing fundamental uncertainty, effective demand, and historically shaped economic behavior. It differs in its assumptions about uncertainty, expectations, and formal equilibrium modeling.

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