LAURENCE BALL New york university N. GREGORY MANKI DAVID ROMER Princeton University The New Keynesian Economics and the Output Infation Trade-off IN THE EARLY 1980s, the Keynesian view of business cycles was in trouble. The problem was not new empirical evidence against Keynesian theories, but weakness in the theories themselves according to the Keynesian view, fluctuations in output arise largely from fluctuations in nominal aggregate demand These changes in demand have real effects because nominal wages and prices are rigid But in Keynesian models of the 1970s the crucial nominal rigidities were assumed rather than Ray Fair, Paul Wachtel, and members of the Brookings Panel for helpful discussions; and the National Science Foundation for financial support 1. Keynesian models of wage and price adjustment based on Phillips curves provided poor fits to the data of the early-to-mid- But subsequent modifications of the models, such as the addition of supply shocks, have led to fairly good performances. See the in Olivier Blanchard oes Money Affect Postwar Developments in Keynesian Perspective, Keynote Le Business c CIRET Conference, Zurich, September