Towards a dynamic disequilibrium theory with randomness
The 2008 Global Financial Crisis, and the myriad other crises confronting economies around the world, exposed the inadequacies of the Dynamic Stochastic General Equilibrium models. These models not only hadn’t predicted the crisis, its occurrence was completely outside of their framework. The framework assumes there are no macroeconomic inconsistencies—all plans are realized, all budget constraints honoured. But after each instance in which that assumption is proved wrong, say in a crisis, the DSGE models assume that kind of event won’t happen again. By contrast, our framework explains why these inconsistencies arise and investigates the consequences, shows how large changes in the aggregate demand could trigger inconsistencies, explains the origins of such changes, and explains why decentralized market forces may be disequilibrating. We identify the crucial departures from the Arrow–Debreu assumptions underlying our results. We analyse the policy implications of this alternative theory, which typically are distinctly different from those of the standard model.
About the Authors
Senior scholar, Director of the Debt Restructuring Program; Editor in chief, Journal of Globalization and Development; Director of graduate studies
Columbia Business School
Martin Guzman is an Associate Research Scholar at the Economics Division of Columbia Business School. His research focuses on macroeconomics and sovereign debt crises. He is the director of Columbia University Initiative for Policy Dialogue's Debt Restructuring Program and editor-in-chief of the Journal of Globalization and Development. He is a member of the Institute for New Economic Thinking Taskforce on Macroeconomic Efficiency and Stability, chaired by Prof. Joseph Stiglitz.
Initiative for Policy Dialogue (IPD)
Joseph E. Stiglitz is co-President of the Initiative for Policy Dialogue, and Chairman of the Committee on Global Thought at Columbia University. He is University Professor at Columbia, teaching in its Economics Department, its Business School, and its School of International and Public Affairs. He chaired the UN Commission of Experts on Reforms of the International Monetary and Financial System, created in the aftermath of the financial crisis by the President of the General Assembly. He is former Chief Economist and Senior Vice-President of the World Bank and Chairman of President Clinton’s Council of Economic Advisors. He was awarded the Nobel Memorial Prize in Economics in 2001.