Free Economics Dissertations - The New Classical School Suggests That If Private Agents Are Watching The
The New Classical School suggests that if private agents are watching the government and trying to form expectations of its future behaviour, not only does it matter what the government does, but it also matters what agents think it will do in the future. This means that a government needs more than just correct current policies. It also needs to establish credibility that it will follow the correct policies in the future.
The New Classical approach gives no role to aggregate demand in influencing business cycles; it provides no role for stabilization operating through monetary and fiscal policies. Indeed, the models used by this school to date predict that the use of such demand management policies might prove to be harmful to an economy as a whole.
SUMMARY AND CONCLUSION
This paper has looked at the three different economic schools of thought namely the New Classical, the monetarist and the Keynesian approach with regard to their view on expectation formation. Additionally, certain models, and empirical evidence that were researched on the subject matter are also mentioned. Finally, we have looked at the effect of the three different economic schools of thought on demand management policies.
It will be worthwhile to conclude that the development of the role of expectations formation will make a more significant contribution to economic theory as a whole, than prejudged assumptions which has been the critical aspect of most research carried out in the past with regard to the three schools of thought. This relates in particular to the New Classical approach in which demand management policies is deemed as irrelevant.
REFERENCES AND BIBLIOGRAPHY
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