Editing Inflation (section)

==== New Keynesians ====

Events during the 1970s proved Milton Friedman and other critics of the traditional Phillips curve right: The relation between the inflation rate and the unemployment rate broke down. Eventually, a consensus was established that the break-down was due to agents changing their inflation expectations, confirming Friedman's theory. As a consequence, the notion of a [[natural rate of unemployment]] (alternatively called the structural rate of unemployment) was accepted by most economists, meaning that there is a specific level of unemployment that is compatible with stable inflation. [[Stabilization policy]] must therefore try to steer economic activity so that the actual unemployment rate converges towards that level.<ref name=Blanchard/>{{rp|176–189}} The trade-off between the [[unemployment rate]] and inflation implied by Phillips thus holds in the short term, but not in the long term.<ref>Chang, R. (1997) [https://www.frbatlanta.org/filelegacydocs/ACFC7.pdf "Is Low Unemployment Inflationary?"] {{webarchive|url=https://web.archive.org/web/20131113212953/https://www.frbatlanta.org/filelegacydocs/ACFC7.pdf|date=November 13, 2013}} ''Federal Reserve Bank of Atlanta Economic Review'' 1Q97: 4–13.</ref> Also the [[1970s energy crisis|oil crises of the 1970s]] causing at the same time rising unemployment and rising inflation (i.e. [[stagflation]]) led to a broad recognition by economists that [[supply shock]]s could independently affect inflation.<ref name=parkin/><ref name=Blanchard/>{{rp|529}}

During the 1980s a group of researchers named [[New Keynesian economics|new Keynesians]] emerged who accepted many originally non-Keynesian concepts like the importance of monetary policy, the existence of a natural level of unemployment and the incorporation of rational expectations formation as a reasonable benchmark. At the same time they believed, like Keynes did, that various [[market imperfection]]s in different markets like labour markets and financial markets were also important to study to understand both inflation generation and [[business cycle]]s.<ref name=Blanchard/>{{rp|533–534}} During the 1980s and 1990s, there were often heated intellectual debates between new Keynesians and new classicals, but by the 2000s, a synthesis gradually emerged. The result has been called the ''new Keynesian model'',<ref name=Blanchard/>{{rp|535}} the "[[new neoclassical synthesis]]"<ref name=Goodfriend>{{cite journal |last1=Goodfriend |first1=Marvin |title=How the World Achieved Consensus on Monetary Policy |journal=Journal of Economic Perspectives |date=1 November 2007 |volume=21 |issue=4 |pages=47–68 |doi=10.1257/jep.21.4.47|s2cid=56338417 |doi-access=free }}</ref><ref>{{cite journal |last1=Woodford |first1=Michael |title=Convergence in Macroeconomics: Elements of the New Synthesis |journal=American Economic Journal: Macroeconomics |date=1 January 2009 |volume=1 |issue=1 |pages=267–279 |doi=10.1257/mac.1.1.267}}</ref> or simply the "new consensus" model.<ref name=Goodfriend/>