How can we explain the persistence of the Great Recession? A Balanced Stability Approach Revised edition July 2013

The Great Recession (GR) creates a stalemate in macroeconomics. On the one hand, standard approaches fail to account for its persistence in a credible way (mainly stress government failures as its deep causes, for example) due to their implicit assumption that the economy is internally stable. On the other, heterodox approaches fail to regain consensus. While often correctly stressing that the roots of the GR lie not only in developments within the financial sector but also in a lack of aggregate demand, they fail to devise an alternative method for showing why this problem has arisen in a systematic way. This paper fills the gap by proposing a new framework called the Balanced Stability Approach. Unlike standard macro, which takes stability for granted, it provides a balanced assessment of stability, considering both positive and problematic aspects of the so-called New Economy (NE), in a broad interdisciplinary perspective. On these grounds, the paper draws the conclusion that the low level of aggregate demand underlying the GR is rooted in a number of wider structural changes generated by the NE.