NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Towards a Dynamic Disequilibrium Theory with Randomness

Martin M. Guzman, Joseph E. Stiglitz

NBER Working Paper No. 27453
Issued in June 2020
NBER Program(s):Economic Fluctuations and Growth

Most macroeconomic crises, such as the 2008 Global Financial Crisis, are associated with endogenous large changes in beliefs and understandings about the workings of the economy. Such downturns and crises are not consistent with the standard paradigm of a well-functioning competitive economy, and macroeconomic equilibrium models based on that paradigm have failed to predict the possibility of those downturns, to explain them, or even to design appropriate policy responses. The framework assumes there are no macroeconomic inconsistencies—all plans are realized, all budget constraints honored.

In this paper, we present 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. Our framework explains why macroeconomic inconsistencies may arise and investigates their consequences. We explain why decentralized market forces may be disequilibrating. We identify the crucial departures from the Arrow-Debreu assumptions and those underlying DSGE models, emphasizing the limitations in the assumption of equilibrium and the absence of a coherent theory of how it is attained, the incompleteness of markets and the non-stationarity of the stochastic processes describing the economy. We analyze the policy implications of this alternative theory, which typically differ markedly from those of the standard model: In particular, the consequences for the effectiveness of different monetary and fiscal policies, and the eventual need of debt restructuring policies to restore macroeconomic consistency.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w27453

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us