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Stability with GrowthMacroeconomics, Liberalization and Development$
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Joseph Stiglitz, José Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis, and Deepak Nayyar

Print publication date: 2006

Print ISBN-13: 9780199288144

Published to Oxford Scholarship Online: September 2006

DOI: 10.1093/0199288143.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 08 August 2020

Formal Approaches

Formal Approaches

(p.150) 9 Formal Approaches
Stability with Growth

Joseph E. Stiglitz (Contributor Webpage)

José Antonio Ocampo (Contributor Webpage)

Shari Spiegel

Ricardo Ffrench-Davis (Contributor Webpage)

Deepak Nayyar

Oxford University Press

This chapter discusses advances in formal economic theory by examining how different positions among economists arise from their different assumptions and models. The discussion focuses on ways in which real world economies differ from the ‘competitive equilibrium’ model that has become the benchmark model. The current benchmark competitive equilibrium framework includes new classical, representative agent, and real business cycle models which assume that all markets (including the labor market) have clear, perfect information, complete markets (including perfect capital and insurance markets), perfect wage and price flexibility, perfect competition, perfect rationality, and no externalities. If these models accurately portrayed reality, the economy would be efficient and there would be no need for government intervention. The assumptions of these models, however, are unrealistic and it is difficult to reconcile the required macro-formulations with what is known about microeconomic behavior (without resorting to ad hoc assumptions about the nature of the stochastic shocks to preferences and technology). The inadequacies of these models are even greater for developing countries where information imperfections are more pervasive and more markets are missing or incomplete (e.g., insurance markets). Accordingly, economic research since the 1990s has focused on identifying the most important limitations of the standard competitive model, particularly those limitations that help to explain the nature of economic volatility.

Keywords:   competitive equilibrium model, new classical model, representative agent model, real business cycle model, wage rigidities, price rigidities, incomplete futures markets, incomplete capital markets, incomplete financial markets, incomplete contracts

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