Irrational Expectations, Unclearing Markets and a Business Cycle That Won't Go Away

The Recent School of New Classical Economists Comes a Cropper on Basic Economic Facts

Dipendra Sinha*

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Abstract. The assumptions and conclusions of New Classical Macroeconomics (NCM) are critically examined. NCM grew out of the alleged failure of the Keynesian school to deal with the problems of stagflation of the 1970s. The two fundamental ideas of the NCM are the rational expectations hypothesis and the theory of instantaneous market clearing. According to the NCM, fiscal and monetary policies will achieve desired results if they are unanticipated. Business cycles are thought to be results of imperfect information on the part of rational agents (people). The NCM has been severely criticized by such prominent economists as Arrow, Tobin and Thurow.

Original languageEnglish
Pages (from-to)345-354
Number of pages10
JournalAmerican Journal of Economics and Sociology
Volume47
Issue number3
DOIs
Publication statusPublished - 1988

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