A dynamic disequilibrium theory with randomness
In this paper, Martin M. Guzman and Joseph E. Stiglitz, develop: a dynamic disequilibrium theory with randomness that is based on the premise that a better way to understand deep downturns is to think of the economy experiencing a constant evolution, marked by uncertainty, in which there is continual learning about the economic system.
Their theory proposes:
- The center of attention should be explaining the large changes in aggregate demand, well beyond the level that can easily be explained by the exogenous shocks buffeting the economy; and in understanding the real time adjustment processes;
- These processes, as shown in the table below, may be destabilizing: rather than quickly restoring the economy to full employment, they move the economy away from it. Those destabilizing forces are just absent in the benchmark macroeconomic models that assume that consistency conditions are always satisfied and that simply assume that the economy constantly re-equilibrates to move along an equilibrium trajectory.
- Their framework for macroeconomic analysis provides a different perspective of the effectiveness of alternative macroeconomic policies, suggesting, in particular that the ineffectiveness of monetary policy may not be due to the zero lower bound, that fiscal policy may be more effective than in the traditional equilibrium theory, and that there are situations in which a restructuring of debt is desirable.
Towards a Dynamic Disequilibrium Theory with Randomness
Authors: Martin M. Guzman, Joseph E. Stiglitz
From: Columbia University
