The core mechanism that drives ecomic growth in modern market ecomies is massive microecomic restructuring and factor reallocation -- the Schumpeterian creative destruction by which new techlogies replace the old. At the microecomic level, restructuring is characterized by countless decisions to create and destroy production arrangements. The efficiency of these decisions depends in large part on the existence of sound institutions that provide a proper transactional environment. In this groundbreaking book, Ricardo Caballero proposes a unified framework to analyze and understand a wide variety of macroecomic phemena stemming from limitations, especially institutional, that hinder these adjustments. Caballero argues that macroecomic models need to be made more structural in a precise sense and can t be maintained on the assumption that decisions are fully flexible. What is needed, he proposes, is the tion of specificity -- the idea that factors of production are t freely interchangeable. Many of the major macroecomic developments of recent decades, he argues, fit naturally into this perspective, including the transition problems of Eastern Europe, the heavy weight of labor regulations in Western Europe, the emerging market crises of the 1990s, the prolonged expansion of the U.S. ecomy, and Japan's stagnation following the collapse of its real estate bubble. After describing the basic arguments of the book and developing models to illustrate two different kinds of specificity (relationship specificity and techlogical specificity), Caballero analyzes a variety of aspects of inefficient restructuring and revisits perennial business cycle patterns such as the cyclical behavior of unemployment, investment, and wages. Finally, he looks at the endogeus response of political institutions and techlogy to opportunistic exploitation of relationship specificity. Ecomists working on macroecomics, development, growth, labor, and productivity issues will find Caballero's conceptual framework applicable to phemena in their fields.
Ricardo J. Caballero is Ford International Professor of Economics at MIT.