His research with John Cogan, Tobias Cwik, and Volcker Wieland showed that the multiplier is much smaller in new Keynesian than in old Keynesian models, a result that was confirmed by researchers at central banks.
32.
However, because prices are sticky in the New Keynesian model, an increase in the money supply ( or equivalently, a decrease in the interest rate ) does increase output and lower unemployment in the short run.
33.
Divine coincidence relies on the assumption specific to the New Keynesian model that the gap between the natural level of output and the efficient ( first-best ) level of output is constant and invariant to shocks.
34.
In a standard New Keynesian model consisting of a Calvo price and sticky wages on the supply side and both an Euler equation and the Taylor rule on the demand side, the so-called New Keynesian Phillips curve ( NKPC ) is the following:
35.
:: In the Keynesian model ( probably the one he used in his General Theory ), the demand curve is logarithmic rather than linear, because it's almost flat on the leftward-half of the graph, then shoots back up on the rightward half, so it looks more like this.
36.
Classical economics has been criticized for its assumptions that the economy works on a full-employment equilibrium which is a false assumption in reality, where the economy often operates at an under-employment equilibrium mainly because of " sticky " wages, which in turn provides the foundation for the Keynesian model of aggregate expenditure.
37.
:" Recently, it was shown that the divine coincicidence does not necessarily hold in the non-linear form of the standard New-Keynesian model . [ 4 ] This property would only hold if the monetary authority is set to keep the inflation rate at exactly 0 %, which is the rate about which the linear form above is obtained as a first-order approximation of the non-linear model.
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