Mr. Keynes and the “Classics”; A Suggested Reinterpretation (with Gauti B. Eggertsson)
NBER Working Paper, August 2021
This paper proposes a resolution to the empirical and theoretical controversy between the Keynesians and the monetarists (“classics”) applying the tools developed in macroeconomics over the past fifty years. The controversy dates to Keynes’ General Theory of Employment, Interest and Money (1936)—famously formalized in Hicks’ (1937) article where the IS-LM model is first stated—and has been a subject of several empirical studies although never resulting in a definitive conclusion. We first re-evaluate previous empirical work with more recent data, overturning existing empirical findings. We then resolve the controversy by leveraging the Lucas critique, the microfoundations of macroeconomics, and the application of game theory to model government behavior.