Download Contemporary Issues in Macroeconomics: Lessons from The by Joseph E. Stiglitz, Martin Guzman PDF

By Joseph E. Stiglitz, Martin Guzman

Stiglitz and Guzman assemble this edited assortment that provides a chain of stories on modern macroeconomic matters and includes a set of key classes for macroeconomic idea and guidelines from the new worldwide monetary crisis.

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Extra resources for Contemporary Issues in Macroeconomics: Lessons from The Crisis and Beyond

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1 Introduction Recent events in the US and Europe have witnessed the limitations of conventional macroeconomic models to predict and explain large economic recessions and crises, and to provide guidance for policies that attempt to resolve them. This chapter describes an agenda (that includes Stiglitz (2015), Guzman and Stiglitz (2014, 2015) that addresses two important puzzles faced by conventional macro models. Firstly, they are incapable of explaining situations in which there are large changes in the state of the economy with no commensurate changes in the state variables that describe it.

At the moment the sunspot is realized, agent A wins and experiences an increase in wealth, while the opposite happens to agent B. But the key issue is that no new pseudo-wealth can be created. The society as a whole feels less wealthy. The presence of pseudo-wealth had led to a positive aggregate borrowing. That debt must be repaid. After the sunspot, there is no more uncertainty, and both individual and aggregate consumption will be smooth. Then, in order to satisfy the transversality condition, aggregate consumption must be smaller than the aggregate endowment in every period since the occurrence of the sunspot.

As the tradable sector was producing using its full capacity, however, production in that sector cannot increase. On the other hand, consumers want to consume less of the non-tradable good, which will occur in equilibrium – and at the same time, production of the nontradable good will be lower. Overall, the economy will not only experience lower consumption after the sunspot, but also lower production. Therefore, the economy will produce less always, that is, both before and after the sunspot, than it would produce in a world with no market for bets.

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