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The Global Financial Crisis and Its Implications for Heterodox Economics. Joseph E. Stiglitz Delhi November 2011. Outline. The failures of the existing paradigm And the policy frameworks based on them Explaining the failures: key assumptions, key omissions Some methodological remarks
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Joseph E. Stiglitz
Reference: “Rethinking Macroeconomics: What Failed and How to Repair It,” Journal of the European Economic Association, 9(4), pp. 591-645.
Policymaking frameworks based on that model (or conventional wisdom) were equally flawed
IMPLICATION: DO NOTHING
Expected benefit small, expected cost large
EACH OF THESE PROPOSITIONS IS FLAWED
Distortions from relative commodity prices being out of equilibrium as a result of inflation are second order relative to losses from financial sector distortions
In the absence of war, state variables (capital stocks) change slowly. Why then can the state of the economy change so quickly?
Fight over who bears losses—and resulting ambiguity in long-term ownership—contributes to slow recovery
Standard result in theory of bargaining with asymmetric information
Frameworks focusing on
Interconnectivity can help absorb small shocks but exacerbate large shocks, can be beneficial in good times but detrimental in bad times
“Contagion, Liberalization, and the Optimal Structure of Globalization,” Journal of Globalization and Development, 1(2),
Battiston, Stefano, DomenicoDelliGatti, Mauro Gallegati, Bruce Greenwald, and Joseph E. Stiglitz, “Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk,” paper presented to the Eastern Economic Association Meetings, February 27, 2009, New York, NBER Paper No.
Hypothesis B: Moving from “banks” to “markets” predictably led to deterioration in quality of information
Undermining ability to have market discipline
Explaining lack of transparency:
Hypothesis C: structural transformations may be associated with extended periods of underutilization of resources
Distorted economy (e.g. associated with bubble) can give rise to analogous problems
(1) βα = βDAA (p, pα) + E DMA (p , w* )
(2) H(E) = βDAM (p, pα) + E DMM (p , w* ) +I
β is the labor force in agriculture, (1 - β) is the labor force in industry,
α is productivity in agriculture,
Dij is demand from those in sector i for goods from sector j
w* is the (fixed) efficiency wage in the urban sector,
I is the level of investment (assumed to be industrial goods),
p is the price of agricultural goods in terms of manufactured goods, which is chosen as the numeraire, and
E is the level of employment (E ≤ 1 - β);
and where we have normalized the labor force at unity.
Even though problem is structural, Keynesian policies work
Even more effective if spending is directed at underlying structural problem
In model, under normal condition, lowering urban wages lowers agricultural prices and urban employment
Hypothesis D: Especially with information imperfections, market adjustments to a perturbation from equilibrium may be (locally) destablizing
Combines elements of increased risk, reduced quality of information, a structural transformation, with two more ingredients:
With greater sensitivity to assumptions (including mathematical assumptions) that effectively assume what was to be proved (e.g. with respect to benefits of risk diversification, effects of redistributions)