Structural Transformation, Deep Downturns, and Government Policy

Stiglitz, Joseph E.

Most recessions are a result of some shock to the economic system, typically amplified by financial accelerators, and leading to large balance sheet effects of households and firms, which result in the effects persisting. But, over time, the balance sheets get restored. Even banks recover. But episodically, the “shock” is deeper. It is structural. Among advanced countries, the movement from agricultural to manufacturing in the last century, and the more recent movement from manufacturing to the service sector reflect such a large economic transformation. The associated downturns are longer lasting. The usual responses, in particular, monetary policy, are only of limited efficacy. Policies have to be designed to facilitate such transformations: markets on their own typically do not do well. This paper explains why such transformations are associated with persistently high unemployment, and describes the effects of particular government policies. It looks at the lessons of the Great Depression both for the advanced countries and the developing countries as they go through their structural transformations.


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Academic Units
NBER Working Paper, 23794
Published Here
February 5, 2019


To be published in Oxford Handbook of Structural Transformation: Structural Transformation, Deep Downturns, and Government Policy, Célestin Monga and Justin Yifu Lin (eds). Also published in African Development Bank Group, Working Paper No. 301, September