The New Keynesian Microfoundation of Macroeconomics

Heinz-Peter Spahn (2009) - The New Keynesian Microfoundation of Macroeconomics, Discussion Paper Univsersity of Hohenheim nr. 317/2009

New Keynesian Macroeconomics (NKM) obeys to the new dogma that macroeconomics should be
firmly grounded in First Principles of micro theory. Households are assumed to run an intertemporal
optimization calculus with respect to leisure and consumption by making use of perfect financial markets.
The supply side is organized so that full employment prevails. Macroeconomic coordination
problems between saving and investment are absent. In order to make model predictions more compatible
with empirical facts, NKM chooses "ad hoc" microfoundations: utility functions and market
structures are designed arbitrarily to allow for persistence of macro variables. NKM's reduced hybrid
macro model, with lags and expectational leads, is a useful "work horse", compatible with various micro
reasoning. However, NKM's insistence on the representative agent obstructs an understanding of
heterogeneous beliefs and learning.