Alan Blinder quotes
Keynesian economics is the economics of nominal rigidities basically, nominal rigidities everywhere. Fully anticipated money does affect output. Everybody can see that! So, it's right. The fact that it's not as theoretically tidy as Lucas's 1972 Journal of Economic Theory paper is not a reason to throw it away. That's become a minority view in this profession, unfortunately. It wouldn't have been in the '60s.
Alan Blinder
The new arguments for rules take an entirely different tack. They are based neither on the ignorance nor the knavery of public officials and, in fact, assume that everyone knows how the economy operates-even the government! Moreover, the government's objectives are assumed to coincide with the people's objectives, and everyone has rational expectations. Despite these seemingly ideal circumstances, modern critics argue that a central bank left with discretion will err systematically in the direction of excessive inflation. To remedy this distortion, they advocate a fixed rule.
Alan Blinder
For a period of roughly 35 years, Keynesian theory provided a central paradigm for macroeconomists, and considerable progress was made on several empirical fronts. It was widely recognized that some of the ingredients of Keynesian economics (e.g. money illusion and/or nominal wage rigidity) rested on slender to non-existent microtheoretic foundations; and there were always dissenters. But, thought of as a collection of empirical regularities that fit together into a coherent whole, the theory worked tolerably well. In the 1970s, however, the Keynesian paradigm was rejected by a great many academic economists, especially in the United States, in favour of what we now call new classical economics. By about 1980, it was hard to find an American academic macroeconomist under the age of 40 who professed to be a Keynesian. That was an astonishing intellectual turnabout in less than a decade, an intellectual revolution for sure.
Alan Blinder
Monetary policy decisions tend to regress toward the mean and to be inertial-and hence biased in just the same way that adaptive expectations are biased relative to rational expectations. But errors like that, while systematic, will generally be small and will tend to shrink over time. And, in return, the system builds in natural safeguards against truly horrendous mistakes.
Alan Blinder