It is well known that John Maynard Keynes meant his General Theory as a piece of work “chiefly addressed to [his] fellow economists” (Keynes 1936: ii),

and he was not to be disappointed: over the following 20 years the economic profession wondered about the relationship between “Keynes and the classics” - starting in 1937 with Hicks on, indeed, “Mr Keynes and the ‘classics’”, and plausibly ending, or so Axel Leijohuvfud (1981: 44) argues, in 1956 with Patinkin on Money Interest and Prices.

To this short sketch should be added that in Keynes’s work another channel could be found through which Say’s law would fail: the theory of liquidity preference, and the idea that investment is mainly expectation driven, provided a second “Keynesian case” drawn from the General Theory, which, however, was often thought to matter only in very extreme (and hence allegedly rare) situations, such as the Great Depression - a view which the NeoS interpretation of Keynes did nothing to dispel. Disagreement on this very point was arguably what set the so-called post-Keynesians apart from mainstream Keynesians. If the General Theory was to be read as the first instalment of the “Monetary theory of production” Keynes had considered in his Cambridge lectures, surely the money/output nexus should be seen as crucial: and though the interpretations of this nexus were many, all shared the idea that Keynes did contribute a novel theory of the working of market economies - a theory where aggregate demand was largely independ­ent of the general price level, and active fiscal policy was required to steer the economy toward full employment.

This historical premise on “old” Keynesianism is in order for two reasons. First, it shows that since its inception, the discussion on Keynes’s views focused on the issue of price (notably wage) rigidity: this emphasis did not go unchallenged, but left a per­manent mark on subsequent developments leading to “new” brands of Keynesianism. Secondly, it also shows that the old brand provided however no proper theory of price rigidity: the idea that one such was the missing bit of a consistent Keynesian model was in many ways the starting point of much of the new Keynesian (NK) economics devel­oped in the 1980s and 1990s.

Historically, the passage from old to new Keynesianism is to be seen against the back­ground of the debates of the 1970s and the rise of new classical (NC) economics, which led to challenging mainstream Keynesianism on the twin charges of poor empirical performance and theoretical weakness. Since the NeoS relied on the one basic empirical argument of nominal stickiness, with the benefit of hindsight it is not surprising that by the end of the 1960s it came increasingly under scrutiny: “stagflation” (significant infla­tion rates coupled with significant unemployment rates) cast many doubts on the idea that the trade-off between unemployment and inflation, if any, was stable enough to offer a recipe policy makers could rely on. At the same time (nay, somehow presciently),

the theoretical underpinnings of the basic model were themselves called into question, most remarkably by Milton Friedman’s celebrated address to the American Economic Association (AEA) in 1968: if firms and workers are rational, any increase in the nominal wage rate will embody expected inflation - the latter is accordingly a major determinant of observed inflation, and any observed correlation between inflation and employment is conditional upon unobservable expectations.

This new “expectation-augmented” framework was to change even the language of macroeconomics. Keynesians could account for the imperfect nominal wage adjustment to inflation borne out by the evidence in terms of “money illusion”; but with no proper theory forthcoming of why such an illusion should persist, Friedman’s argument proved final, with dramatic consequences on the theory of economic policy: not only no perma­nent trade-off between inflation and unemployment should be expected, but discretion­ary monetary policy as such, far from being a way to control aggregate demand, is likely to have a positively destabilizing effect for being inevitably inflation prone.

Or was it? The charge against the NeoS model amounted in many ways to a meth­odological indictment of shaky foundations: the “classical” label of the NC school did not just refer to its scepticism about monetary policy (in the 1970s the main substantive part of the “rational expectation revolution”); it was also an explicit call for a “classical” methodology, such that, when this is properly adhered to, a Walrasian picture is bound to emerge: after all, Keynes never really challenged the framework of perfect competi­tion. Though this conclusion seemed inescapable to many, however, the new theoretical ground being trod was itself slippery, as the NC framework rested on premises, which soon began to be questioned. Prominent among these, the Walrasian picture itself: even granting that the Keynesian model was suffering from a micro-foundations problem, that in itself should not imply that the Walrasian framework provides the apt micro­structure upon which macroeconomics should be built.

This entry gathers some general perspectives on the way this game was actually played out in the 1980s and 1990s. Before laying down the main NK cards, however, one prior warning is in order: “NK economics” is a somewhat vague term, to which many approaches have come to be associated. As a consequence this entry cannot help setting some boundaries, and committing itself to some taxonomy: we shall consider only static models bearing out the Keynesian message that unemployment is an equilibrium feature of the economy; and we shall rely on the time-honoured distinction between partial and general equilibrium approach. Thus in the sequel we shall consider the main NK contri­butions looking first at partial equilibrium models, and then at the general equilibrium approach. For general assessments on the new Keynesianism, the reader is referred to, among others, Anderson (1994), Benassi et al. (1994), Dixon and Rankin (1995), Greenwald and Stiglitz (1988; 1993), Mankiw and Romer (1991) and Mankiw (1992).