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Informational Imperfections in the Capital Market and Macroeconomic Fluctuations

Stiglitz, Joseph E.; Greenwald, Bruce C.; Weiss, Andrew

Traditional neoclassical theory has one clear, unambiguous, and verifiable prediction. All factors which have a positive price are fully utilized. In recent years, there have been several responses to the apparent inconsistency between the predictions of neoclassical theory and what has in fact been observed. The first is to deny the empirical observations. The 25 percent of the population that were unemployed in the Great Depression, let alone the 10 percent of the population that were unemployed in the Reagan recession, were not involuntarily unemployed. This seems to the authors, at best, semantic quibbling. The second is to argue, without much justification, that there are two regimes. Traditional neoclassical theory applies in "normal times." It seems more plausible to us that the market failures represented by the Great Depression are always present in the economy, but difficult to detect; it is only when they reach the proportions that they do periodically that we can no longer ignore them. A third approach is to modify the standard theory, to assume that wages and prices are fixed.

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American Economic Review

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Economics
Published Here
April 29, 2013
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