13. Perspectives on a Sovereign Debt Restructuring Framework: Less Is More

Conn, Richard A.; Guzmán, Martín; Ocampo, José Antonio; Stiglitz, Joseph E.

doi:10.7312/guzm17926-015

Cited by 2 publications

References 0 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

Towards a dynamic disequilibrium theory with randomness

Guzmán¹,

Stiglitz

2020

Oxford Review of Economic Policy

View full text Add to dashboard Cite

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.

show abstract

Towards a dynamic disequilibrium theory with randomness

Guzmán¹,

Stiglitz

2020

Oxford Review of Economic Policy

View full text Add to dashboard Cite

show abstract

Towards a Dynamic Disequilibrium Theory with Randomness

Guzmán¹,

Stiglitz²

2020

View full text Add to dashboard Cite

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 nonstationarity 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.

show abstract

13. Perspectives on a Sovereign Debt Restructuring Framework: Less Is More

Cited by 2 publications

References 0 publications

Towards a dynamic disequilibrium theory with randomness

Towards a dynamic disequilibrium theory with randomness

Towards a Dynamic Disequilibrium Theory with Randomness

Contact Info

Product

Resources

About