Editing New Keynesian economics (section)

===2000s===

In the new millennium there have been several advances in new Keynesian economics.

====Introduction of imperfectly competitive labor markets====
Whilst the models of the 1990s focused on sticky prices in the output market, in 2000 Christopher Erceg, Dale Henderson and Andrew Levin adopted the Blanchard and Kiyotaki model of unionized labor markets by combining it with the Calvo pricing approach and introduced it into a new Keynesian DSGE model.<ref>Erceg, C., Henderson, D. and Levin, A. (2000). "Optimal monetary policy with staggered wage and price contracts". ''Journal of Monetary Economics'' 46. pp. 281–313.</ref>

====Development of complex DSGE models====
To have models that worked well with the data and could be used for policy simulations, quite complicated new Keynesian models were developed with several features. Seminal papers were published by Frank Smets and Rafael Wouters<ref>{{cite journal | last1 = Smets | first1 = Frank | last2 = Wouters | first2 = Raf | year = 2003 | title = An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area | journal = Journal of the European Economic Association | volume = 1 | issue = 5| pages = 1123–1175 | doi = 10.1162/154247603770383415 | hdl = 10419/144249 | hdl-access = free }}</ref><ref>Frank Smets & Rafael Wouters (June 2007). "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach".'' American Economic Review'' 97(3). American Economic Association. pp. 586–606.</ref> and also [[Lawrence J. Christiano]], [[Martin Eichenbaum]] and Charles Evans<ref>{{cite journal | last1 = Christiano | first1 = Lawrence | last2 = Eichenbaum | first2 = Martin | last3 = Evans | first3 = Charles | year = 2005 | title = Nominal rigidities and the dynamic effects of a shock to monetary policy | url = http://faculty.wcas.northwestern.edu/~yona/research/paperaugust262003.pdf | journal = Journal of Political Economy | volume = 113 | issue = 1| pages = 1–45 | doi=10.1086/426038| citeseerx = 10.1.1.320.606 | s2cid = 158727660 }}</ref> The common features of these models included:

*Habit persistence. The marginal utility of consumption depends on past consumption.
*Calvo pricing in both output and product markets, with indexation so that when wages and prices are not explicitly reset, they are updated for inflation.
*Capital adjustment costs and variable [[capacity utilization|capital use]].
*New shocks
**Demand shocks, which affect the marginal utility of consumption
** [[Markup (business)|Markup shocks]] that influence the desired markup of price over marginal cost.
*Monetary policy is represented by a Taylor rule.
*[[Bayes estimator|Bayesian estimation]] methods.

====Sticky information====
The idea of sticky information found in Fischer's model was later developed by Gregory Mankiw and [[Ricardo Reis]].<ref>{{cite journal |last1=Mankiw |first1=N. G. |first2=R. |last2=Reis |year=2002 |title=Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve |journal=[[Quarterly Journal of Economics]] |volume=117 |issue=4 |pages=1295–1328 |doi=10.1162/003355302320935034 |s2cid=1146949 |url=http://nrs.harvard.edu/urn-3:HUL.InstRepos:3415324 }}</ref> This added a new feature to Fischer's model: there is a fixed probability that a worker can replan their wages or prices each period. Using quarterly data, they assumed a value of 25%: that is, each quarter 25% of randomly chosen firms/unions can plan a trajectory of current and future prices based on current information. Thus if we consider the current period: 25% of prices will be based on the latest information available; the rest on information that was available when they last were able to replan their price trajectory. Mankiw and Reis found that the model of sticky information provided a good way of explaining inflation persistence.

Sticky information models do not have nominal rigidity: firms or unions are free to choose different prices or wages for each period. It is the information that is sticky, not the prices. Thus when a firm gets lucky and can re-plan its current and future prices, it will choose a trajectory of what it believes will be the optimal prices now and in the future. In general, this will involve setting a different price every period covered by the plan. This is at odds with the empirical evidence on prices.<ref>{{cite journal |first1=V. V. |last1=Chari |first2=Patrick J. |last2=Kehoe |first3=Ellen R. |last3=McGrattan |year=2008 |url=http://www.minneapolisfed.org/research/sr/sr409.pdf |title=New Keynesian Models: Not Yet Useful for Policy Analysis |journal=Federal Reserve Bank of Minneapolis Research Department Staff Report 409 }}</ref><ref name="Knotec2010">{{cite journal |first=Edward S. II |last=Knotec |year=2010 |title=A Tale of Two Rigidities: Sticky Prices in a Sticky-Information Environment |journal=Journal of Money, Credit and Banking |volume=42 |issue=8 |pages=1543–1564 |doi=10.1111/j.1538-4616.2010.00353.x }}</ref> There are now many studies of price rigidity in different countries: the United States,<ref name="KlenowKryvtsov2008">{{cite journal |first2=Oleksiy |last2=Kryvtsov |first1=Peter J. |last1=Klenow |year=2008 |title=State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation? |journal=[[The Quarterly Journal of Economics]] |volume=123 |issue=3 |pages=863–904 |doi=10.1162/qjec.2008.123.3.863 |citeseerx=10.1.1.589.5275 }}</ref> the Eurozone,<ref>{{cite journal |first1=Luis J. |last1=Álvarez |first2=Emmanuel |last2=Dhyne |first3=Marco |last3=Hoeberichts |first4=Claudia |last4=Kwapil |first5=Hervé |last5=Le Bihan |first6=Patrick |last6=Lünnemann |first7=Fernando |last7=Martins |first8=Roberto |last8=Sabbatini |first9=Harald |last9=Stahl |first10=Philip |last10=Vermeulen |first11=Jouko |last11=Vilmunen |year=2006 |title=Sticky Prices in the Euro Area: A Summary of New Micro-Evidence |journal=[[Journal of the European Economic Association]] |volume=4 |issue=2–3 |pages=575–584 |doi=10.1162/jeea.2006.4.2-3.575 |s2cid=56011601 |url=http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp563.pdf }}</ref> the United Kingdom<ref>{{cite journal |first1=Philip |last1=Bunn |first2=Colin |last2=Ellis |year=2012 |title=Examining The Behaviour Of Individual UK Consumer Prices |journal=[[The Economic Journal]] |volume=122 |issue=558 |pages=F35–F55 |doi=10.1111/j.1468-0297.2011.02490.x |s2cid=153322174 }}</ref> and others. These studies all show that whilst there are some sectors where prices change frequently, there are also other sectors where prices remain fixed over time. The lack of sticky prices in the sticky information model is inconsistent with the behavior of prices in most of the economy. This has led to attempts to formulate a "dual stickiness" model that combines sticky information with sticky prices.<ref name="Knotec2010" /><ref>{{cite journal |first1=Bill |last1=Dupor |first2=Tomiyuki |last2=Kitamura |first3=Takayuki |last3=Tsuruga |title=Integrating Sticky Prices and Sticky Information |journal=[[Review of Economics and Statistics]] |year=2010 |volume=92 |issue=3 |pages=657–669 |doi=10.1162/REST_a_00017 |citeseerx=10.1.1.595.2382 |s2cid=57569783 }}</ref>