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Stable Growth in an Era of Crises; Learning from Economic Theory and History

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  • Joseph E. Stiglitz

    (Columbia University)

Abstract

The financial crisis and the Great Recession to which it gave rise exposed the deep flaws in standard macro-economic models, and in the way those models were deployed. In this paper, based on a talk given to the Turkish Economic Association in November 2012, Joseph E. Stiglitz discusses the range of these deficiencies and the ways in which the models must be re- formed. The paper first examines five particular issues in the current policy debate and explains why the standard model provides a misguided framework for addressing them. The paper identifies the fundamental flaws in the standard model, and argues that in trying to fine tune the models for “normal” periods, it failed to address the more profound question of how to explain deep down- turns, including slow recoveries. A central lacuna is the lack of attention to credit and the institutions pro- viding it. It explains how a better understanding of banks would have led to better ways to recapitalize the banking system than those employed in the aftermath of the crisis. Finally, the paper relates all of these issues to the on- going Euro crisis, showing in particular that the structure of the euro, though seemingly designed to improve the efficiency of resource allocations, has actually created an unstable and inefficient system.

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File URL: http://ekonomitek.org/pdffile/no4_07_joseph_e_stiglitz.pdf
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Bibliographic Info

Article provided by Turkish Economic Association in its journal Ekonomi-tek.

Volume (Year): 2 (2013)
Issue (Month): 1 (January)
Pages: 1-39

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Handle: RePEc:tek:journl:v:2:y:2013:i:1:p:1-39

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Related research

Keywords: State of macroeconomics; macroeconomic models and their deficiencies; economic crises; macroeconomic policies; recapitalization of the banking system; the Euro crisis;

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References

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  1. Thomas Herndon & Michael Ash & Robert Pollin, 2013. "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff," Working Papers wp322, Political Economy Research Institute, University of Massachusetts at Amherst.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," NBER Working Papers 15639, National Bureau of Economic Research, Inc.
  3. Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2006. "Business fluctuations in a credit-network economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 68-74.
  4. Stefano Battiston & Domenico Delli Gatti & Mauro Gallegati & Bruce Greenwald & Joseph E. Stiglitz, . "Default Cascades: When Does Risk Diversification Increase Stability?," Working Papers ETH-RC-11-006, ETH Zurich, Chair of Systems Design.
  5. Jeanne, O. & Korinek, A., 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," Discussion Paper 2010-108S, Tilburg University, Center for Economic Research.
  6. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
  7. Gallegati Mauro & Greenwald Bruce & Richiardi Matteo G & Stiglitz Joseph E., 2008. "The Asymmetric Effect of Diffusion Processes: Risk Sharing and Contagion," Global Economy Journal, De Gruyter, vol. 8(3), pages 1-22, September.
  8. Olivier Jeanne & Anton Korinek, 2010. "Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach," American Economic Review, American Economic Association, vol. 100(2), pages 403-07, May.
  9. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
  10. Stiglitz, Joseph & Ocampo, Jose Antonio & Spiegel, Shari & Ffrench-Davis, Ricardo & Nayyar, Deepak, 2006. "Stability with Growth: Macroeconomics, Liberalization and Development," OUP Catalogue, Oxford University Press, number 9780199288144.
  11. Guido Sandleris, 2012. "The Costs of Sovereign Defaults:Theory and Empirical Evidence," Business School Working Papers 2012-02, Universidad Torcuato Di Tella.
  12. Dean Baker, 2010. "The Myth of Expansionary Fiscal Austerity," CEPR Reports and Issue Briefs 2010-23, Center for Economic and Policy Research (CEPR).
  13. Michael Woodford, 2009. "Convergence in Macroeconomics: Elements of the New Synthesis," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 267-79, January.
  14. Gatti, Domenico Delli & Gallegati, Mauro & Greenwald, Bruce C. & Russo, Alberto & Stiglitz, Joseph E., 2012. "Mobility constraints, productivity trends, and extended crises," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 375-393.
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