The New Neoclassical Synthesis, the Phillips Curve and the Art of Economic Policy

Abstract

The Phillips curve has been at the same time an econometric object, a trade-off curve and an analytical equation representing the aggregate supply in a macro model. The paper considers these aspects as they emerge from the so called new “neoclassical synthesis'' models used for monetary policy. These models, while reviving Hicks' IS-LM apparatus within a real business cycle framework, try to empower the authority with “objective'' guidelines so that monetary policy can become a science. This claim is challenged by showing the weaknesses of this new approach from the triple perspective discussed above. By introducing an interaction between fiscal and monetary policies, a model is obtained where the dynamics of the debt are endogenous, inflation has relevant effects and the Phillips curve is in keeping with the conventional stylized facts. This opens the way to the presence of an uncertain world where economic policy becomes an art.

Keywords: small macro models, Phillips curve, interaction between policies, simulations

JEL Classification: E32, E37, E52