This sounded a bit funny to me – New Keynesianism is a framework for models, one where I had seen the persistence in unemployment, and employment (which is a well known stylized fact) before. So I went to google:
And it immediately came up with a working paper from two of the big boys – Blanchard and Gali. Conclusion being:
The extent of real wage rigidities determines the amplitude of unemployment fuctuations under the optimal policy. Furthermore, unemployment displays intrinsic persistence, i.e. persistence beyond that inherited from productivity. The degree of persistence is decreasing in the job finding rate. Hence, the more sclerotic is the labor market the more persistence is unemployment.
In the paper there is discussion of models with hiring costs, labour market frictions, rigidities in the real wage, and in nominal prices. They don’t discuss some other things I’ve seen from New Keynesians, such as employment/investment/production decisions made off the back of a lagged state variable, but those sorts of concepts are rolling around as well.
In essence, the New Keynesian framework is grappling with a large number of issues, and trying to analyse them in a consistent way. I just find it a little strange that we would say “and so the New Keynesian story is wrong” just because some of the current models can’t pick some things – it is like saying “microeconomics is wrong, because it doesn’t perfectly describe all human behaviour”. Yes, it is a discipline that needs investment and time – but as a framework for putting models inside, it is pretty useful right.
I’m not saying things are perfect now, but I am saying that all the hating on the New Keynesian framework seems a touch out of place – given that all it is doing is providing a transparent and internally consistent method where people can build their own model of the economy by introducing what they believe are realistic “core” assumptions.