Towards a General Theory of Deep Downturns: Presidential by Joseph E. Stiglitz

By Joseph E. Stiglitz

Joseph Stiglitz examines the speculation at the back of the commercial downturns that experience plagued our global lately. This interesting three-part lecture recognizes the failure of financial versions to effectively expect the 2008 challenge and explores replacement types which, if followed, may perhaps in all likelihood fix a strong and filthy rich economic climate.

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Towards a General Theory of Deep Downturns: Presidential Address from the 17th World Congress of the International Economic Association in 2014

Joseph Stiglitz examines the idea in the back of the industrial downturns that experience plagued our international in recent years. This interesting three-part lecture recognizes the failure of monetary versions to effectively expect the 2008 problem and explores substitute versions which, if followed, may probably repair a good and wealthy financial system.

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There are redistributive consequences, but in a representative agent model, these do not matter. But again, with the after tax wage lower, if there is some flexibility in prices, prices today will fall, and this will shift consumption forward in time, with all the consequences that we previously described. Again, compared with the other NK models, the demand effects may be underestimated, because of the assumption of Ricardian equivalence, or overestimated, because of the absence of redistribution effects.

Assume the government wishes to smooth out the fluctuation by reducing the payroll tax. Standard theory says it does not make any difference to the competitive equilibrium on whom the tax is levied, whether the worker or the firm; but in the following discussion, we focus on how in the short run, adjustments differ and that matters for the short-run equilibrium. Consider an institutional arrangement where the payroll tax is paid by workers, and the reduced tax increases the paycheck received by the worker.

The equity in the firm has to be rebuilt, through retained earnings, and this is a slow process. And that is a key reason for the persistence of downturns. But, as I discuss below, truly deep downturns are more than balance sheet recessions: they can persist even after balance sheets are largely restored. Risk perceptions and confidence In the standard model, confidence and the extent of uncertainty matters little: because risk is diversified throughout the economy (through perfect insurance markets), what matters is the mean return.

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