In the 1980s theoretical research in macroeconomics was dominated by what has become known as new-Keynesian economics. The principal aim of new-Keynesian economics is to explain how Keynesian results can be reconciled with the neo-classical principles of utility and profit maximization. This paper provides a survey and an assessment of New Keynesian economics. In our view, the theoretical foundation of new-Keynesian economics would be strengthened if more institutional detail is added to the analysis. The real challenge for new-Keynesian economics is to develop macroeconomics (and microeconomics) from a theory that takes the working of markets seriously.
We would like to thank David Colander, Paul Davidson. Theo van de Klundert and Simon Kuipers for their comments on this paper and Esther Langeveld for research assistance. Of course, the usual disclaimer applies. An extended version of this paper, which addresses teh empirical evidence in substantially more detail is available as Research Memorandum no. 488 of the University of Groningen. Parts of section 3 are based on Van Ees (1991) and Garretsen (1992).