ABSTRACT
The new approach in macroeconomics has had practical implications for macroeconomic policy and has changed CB practice in many countries. Despite its rigour, simplifications reduce the closed economy DSGE model to an aggregate supply (AS) or Phillips curve and aggregate demand (AD) curve, which differ from the standard curves only in the presence of forward-looking variables. The latter follow from rigourous underlying optimisation by agents with foresight (Clarida et al., 1999; Woodford, 2003). These foundations make the parameters of the curves robust. In addition to straightforward policy analysis, the underlying optimising microfoundations also make welfare analysis feasible. Yet, the framework is simple enough to be used to form policy intuitions.
