Paul Krugman explains why one should believe in the Keynesian model. There are two main points he emphasizes:
First, we’re talking about a model, not just a prediction about the impact of spending increases. So you can ask about the ancillary predictions of that model as opposed to rival models. Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?
Ricardian equivalence predicts that policy will not effect the interest rate.
The second point:
Also, there are some features of the approach that can be tested separately. Keynesianism isn’t just about sticky prices, but it does generally assume sticky prices — and there is overwhelming evidence, from a variety of sources, that prices are indeed sticky.
Evidence that prices do not adjust instantaneously does not imply that price stickiness…
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