Increased Policy Space under Globalization Rohit Azad and Anupam Das

[Working Paper No. 04/2012] A severe blow to active Keynesian policy intervention occurred as a result of the New Classical resurgence in macroeconomics. With a vertical aggregate supply curve in the short and the long runs (New Classicals) or at least in the long run (New Keynesians), it has been argued that the economy settles down at a unique non-accelerating inflation rate of unemployment (NAIRU) without any government intervention. Implicit in the NAIRU theory is that the prices can decrease just as they can increase. However, if the prices cannot decrease, the aggregate supply curve would be an inverse-L shaped…