New Keynesian macroeconomics is built on a foundation that assumes imperfect competition (i.e., businesses that can set prices). This imperfect competition results in quantities that are inefficiently low. This foundation has three policy implications (one for each tweet):
1. Micro policies like competition policy have the potential to improve welfare by raising quantities (or lowering prices in specific markets).
Personally I'm concerned about the reduction in competition and overly lax anti-trust. And glad to see President Biden addressing it.
Personally I'm concerned about the reduction in competition and overly lax anti-trust. And glad to see President Biden addressing it.
2. Recessions are even worse than we thought and should be vigorously combatted with macroeconomic tools.
The intuition is that if your baseline is below where it should be then going even further below that is a particularly large loss (technically a first order loss).
The intuition is that if your baseline is below where it should be then going even further below that is a particularly large loss (technically a first order loss).
3. Fiscal and monetary policy still face a constraint outside of the context of a recession (or temporary shortfall).
Macro policy still faces an inflation constraint that is dictated, partly, by the competitive structure of the economy. So can't solve the chronic shortfall.
Macro policy still faces an inflation constraint that is dictated, partly, by the competitive structure of the economy. So can't solve the chronic shortfall.
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