User’s Guide for New Keynesian Macroeconomics

Purpose - This paper aims to guide some graduate students to the introduction level of New Keynesian Macroeconomics. The theory of real business cycle asserts that economic fluctuations might be driven entirely by real shocks such as preference or technology shocks or government appending shocks. Research design, data, and methodology - Flexible price monetary models in the spirit of real business cycle can generate real effects to monetary disturbances. But, these effects were not qualitatively consistent with the empirical evidence produced for instance by monetary structural VARs(Vector Autoregressive). Results - Over all the empirical evidence is that short run effects of monetary shocks on real variables are persistent. Furthermore there is micro evidence on price setting behavior: significant price and wage rigidities. Conclusions - The New Keynesian (NK) model takes a real business cycle model as its backbone and adds to the sticky prices, a form of nominal rigidity that allows purely nominal shocks to have real effects, and which alters the response of the economy to real shocks in a way that gives rise to a non-trivial role for active stabilization policy. This paper is based on chapter the text book works of Woodford (2003), Walsh (2003) and Gali(2008).