Several assumptions are common to most New Classical models. Primarily, all agents are assumed to be rational (utility-maximising) and possess rational expectations. At any one time, the macroeconomy is assumed to have a unique equilibrium at full employment or potential output and this equilibrium is assumed to always have been achieved via price and wage adjustment (market clearing).
New classical economics has also pioneered the use of representative agent models. Such models have recently received severe neoclassical criticism, pointing to the clear disjuncture between microeconomic behavior and macroeconomic results, as indicated by Kirman (1992), and the fallacy of composition. In some ways, this critique is akin to the Cambridge capital controversy, which discredited the neoclassical aggregate production function.
The most famous New Classical model is that of Real Business Cycles, developed by Robert Lucas, Jr., Finn E. Kydland, and Edward C. Prescott, building upon the ideas of, among others, John Muth.
References
- Kirman, Alan P. (1992). "Whom or What does the Representative Individual Represent?". Journal of Economic Perspectives 6 (2): 117–136.
External links
- Robert King's article New Classical Macroeconomics from the Concise Encyclopedia of Economics at the Library of Economics and Liberty.
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Last updated on Wednesday August 27, 2008 at 14:45:28 PDT (GMT -0700)
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