The Last Great Depression of the XXth Century: A Dynamical Approach

The dramatic fall in output in eastern Europe in the 90s was a result of the institutional structure imposed by the state - taken here as exogenous - on the production process. Consider therefore an economic system where the state is promoting a policy of 'forced capital formation' to fund a technology which produces higher output. The drawback is that such a system becomes internally unstable: even though economic growth takes place in the short run, in the long run the economy moves into a transition path towards a stable lower income (unless the relationship between the political sector and the economy changes and the state withdraws from the capital formation process). As output loss reached the level of another Great Depression, pecularities of this phenomenon of East Europe can bring new insight into what is triggering great depressions.