Working Paper: NBER ID: w23794
Authors: Joseph E. Stiglitz
Abstract: 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. \nBut 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. \nThis 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.
Keywords: structural transformation; economic downturns; government policy; industrial policy
JEL Codes: G01; L52; N12; O14; O25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structural transformations (P39) | persistent high unemployment (J64) |
| structural transformations (P39) | prolonged economic downturns (F44) |
| failure of markets to manage transitions (P23) | deep and enduring economic downturn (E32) |
| government policies (H59) | mitigate adverse effects on employment and economic stability (J68) |
| inadequate management of structural transformations (L16) | economic crises (G01) |
| transition from one economic structure to another (P39) | significant balance sheet effects for households and firms (G59) |
| significant balance sheet effects for households and firms (G59) | prolonged recovery process (I12) |
| traditional monetary policy responses (E52) | insufficient to address challenges posed by structural changes (L16) |