The 'modern' view of macroeconomics: some critical reflections

David Romer has proposed a new basic macroeconomic framework: the IS-MP-IA model. Its proponents claim that it represents the 'modern' view of macroeconomics. We show that the new framework remains closely attached to the neoclassical synthesis and, in addition, does not take account of: (i) the empirical evidence on the output-inflation trade-off; (ii) the evidence on the interdependence of aggregate demand and supply; (iii) the institutional limits of monetary policy; and (iv) the implications for macroeconomic policy of (i), (ii) and (iii). Once these aspects have been incorporated, short-run stabilisation policy is not neutral in the long run, the notion of a 'natural' rate of interest becomes untenable and aggregate demand turns into the crucial exogenous variable.