New Keynesian Economics

New Keynesian economics is a school of macroeconomics that supplies rigorous microeconomic foundations for Keynesian conclusions, real economic effects from demand shocks, and a role for stabilization policy, using the same rational-expectations toolkit New Classical economists built. Where New Classical models assume markets clear continuously through flexible prices, New Keynesian models assume imperfect competition in price and wage setting, so prices and wages are 'sticky' and adjust only gradually. Stanley Fischer's 1977 sticky-information model and John B. Taylor's 1979-80 staggered wage-setting framework were early formalizations; Guillermo Calvo's 1983 staggered-price-contracts model became the field's standard workhorse. The approach dominates mainstream central-bank macroeconomic modeling today, including the dynamic stochastic general equilibrium (DSGE) models most major central banks use for policy analysis.