Macroeconomic Theoretical Frameworks

There are numerous schools of thought within the discipline of macroeconomics, each with a unique perspective on how markets and their players function.

Classical

Building on Adam Smith's original theories, classical economists maintained that rates, wages, and prices are flexible and that markets tend to clear unless inhibited by government policy. The phrase "classical economists" refers to earlier economic theorists with whom Karl Marx and later Keynes disagreed, rather than a specific school of macroeconomic thought.

Keynes-style

Keynesian economics marked the separation of macroeconomics from microeconomics as a distinct field of study and was primarily based on the writings of John Maynard Keynes. Keynesians emphasize that the main cause of problems like the business cycle and unemployment is aggregate demand.

Keynesian economists contend that active government intervention in the form of fiscal policy—spending more during recessions to boost demand or less during expansions to reduce it—is the best way to control the business cycle. They also support monetary policy, in which a central bank uses lower interest rates to encourage lending and higher rates to restrain it.

Keynesian economists also think that some systemic rigidities—sticky prices in particular—hinder the proper clearing of supply and demand.

Keynesian economics was the first field of study to distinguish macroeconomics from microeconomics, and it was primarily based on the writings of John Maynard Keynes. Keynesians emphasize that the main cause of problems like the business cycle and unemployment is aggregate demand.

MONETARIST

A subset of Keynesian economics known as the Monetarist school is primarily due to Milton Friedman's contributions. Monetarists contend that monetary policy is typically a more desirable and successful tool for managing aggregate demand than fiscal policy, working within and extending Keynesian models. Monetarists, however, also recognize that there are boundaries to monetary policy that render adjusting the economy imprudent. As a result, they typically favor strict adherence to regulations that support stable rates of inflation.

NEW CLASSICAL

The main goal of the New Classical school and the New Keynesians is to reconcile the obvious theoretical inconsistencies between macroeconomics and microeconomics by incorporating microeconomic foundations into macroeconomics.

Microeconomic models and their significance are emphasized by the New Classical school. Macroeconomic models developed by New Classical economists take into account the supposition that all agents seek to maximize their utility and have reasonable expectations. According to New Classical economists, monetary policy can control inflation while discretionary fiscal policy destabilizes and unemployment is primarily voluntary.

NEW KEYNESIAN

The New Keynesian school also aims to give conventional Keynesian economic theories microeconomic underpinnings. Even though New Keynesians concede that rational expectations drive the behavior of households and businesses, they nevertheless contend that a number of market imperfections exist, such as sticky prices and wages. Owing to this "stickiness," fiscal and monetary policy are two ways that the government can enhance macroeconomic conditions.

AUSTRIAN

An earlier economics school that is experiencing some resurgence in popularity is the Austrian School. Microeconomic phenomena are the primary focus of Austrian economic theories. They never did, however, strictly distinguish between micro- and macroeconomics, just like the so-called classical economists.

Furthermore, Austrian theories have significant ramifications for topics that are typically classified as macroeconomic. Specifically, the Austrian business cycle theory explains how monetary policy and the function of money and banking in connecting (microeconomic) markets to one another and to time can cause broadly synchronized (macroeconomic) swings in economic activity across markets.