MainstreamFrom 1980s
New Keynesian economics
Why are prices sticky, and how should a central bank set interest rates?
The 30-second version
Today's mainstream macroeconomics. It combines forward-looking people with sticky prices, which gives central banks a reason to manage interest rates. Every major central bank uses it. Its big miss: before 2008 its models had almost no banks in them.
Big questions it works on
Go deeperKey ideas, thinkers, evidence and where it stands today
Key ideas
- Rational expectations plus sticky prices and wages (menu costs, Calvo pricing).
- Dynamic stochastic general equilibrium (DSGE) models.
- The Taylor rule (1993): raise rates more than one-for-one with inflation.
- Inflation targeting and forward guidance.
Key thinkers
Greg Mankiw, Olivier Blanchard, Jordi Galí, John Taylor, Michael Woodford (Interest and Prices, 2003), Ben Bernanke
What it got right
Inflation targeting coincided with the “Great Moderation” of steadier growth. These models are used by every major central bank, including the ECB.
Main criticisms
Before 2008 most of these models had no meaningful banking sector, so they missed the crisis. A single “representative household” hides inequality. Newer HANK models add many different households to fix this.
Evidence worth knowing
Robert Hall and Michael Woodford won the 2026 Nobel for the microeconomic foundations of macroeconomic stabilisation. Bernanke shared the 2022 prize for showing how bank failures deepen downturns.
Where it stands today
The mainstream of macroeconomics.
Family line
Merges new classical methods with Keynesian conclusions.