Comment of the Day: : On where standard Hicksian-inclined economists' predictions have fallen down: "Hicksian is not a synonym for new Keynesian...
...It should be consistent with Keynes (I mean Hicks was trying to understand and explain Keynes). Certainly Keynes and Hicks understood in 1936 and 1937 that the long run could take a long time to arrive.
Keynes certainly considered nominal stickiness to be other than key (he wasn't as clear as Krugman has been about the key role of the liquidity trap but he did write 'until liquidity preference becomes absolute' when discussing sticky wages and so referred to two separate possible problems).
I don't know where to put this paragraph in this comment, but I think I can guess Krugman's response to your criticism. The convergence to the long run balanced growth path is based on the new Keynesian view of aggregate supply not of (nominal) aggregate demand. You discuss contracts but actually existing contracts are related to the supply of goods and services not demand. They are also related to the Phillips curve and why it isn't vertical in the short run. Krugman calls that supply not demand.
I think Krugman was writing about what surprised him after 2008. The long run took a very long time to arrive in Japan in the 90s.
My complaint with Krugman is that the long also never arrived here in Italy. Extremely persistent high unemployment without deflation isn't a new phenomenon. Nor did it occur only in the 30s in countries in liquidity traps.
