Keynesian Economics

Keynesianism refers to a school of economic thought advanced by the British economist John Maynard Keynes in the early 20th century. In his 1936 work The General Theory of Employment, Interest and Money, Keynes outlined a set of macroeconomic theories and models of how aggregate demand which have strongly explanatory power for modelling economic output and inflation. Keynes's work together with the post-war neoclassic school, pioneered by Kenneth Arrow and others, gave rise to what is the mainline branch of modern economics that focuses on quantitative and empirical models to explain market phenomenon.

A defining feature of Keynesian thought is that in the presence of market shocks and business cycles, economies do not naturally stabilize themselves very quickly and thus require active intervention that boosts short-term demand in the economy. Keynesians argue that wages and employment are slower to respond to the needs of the market and require central banks and governmental intervention to smooth over economic turbulence and mitigate recessions. This school of thought largely influences the modern fiscal interventionist policies of central banks like the Federal Reserve and the European Central Bank in their policies in the post Bretton Woods era.


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