Coordinating Business Cycles

72 Pages Posted: 21 Feb 2015 Last revised: 19 Sep 2015

See all articles by Edouard Schaal

Edouard Schaal

New York University (NYU), Department of Economics

Mathieu Taschereau-Dumouchel

Cornell University - Department of Economics

Date Written: September 18, 2015


We develop a quantitative theory of business cycles with coordination failures. Because of demand complementarities, firms seek to coordinate production and multiple equilibria arise. We use a global game approach to discipline equilibrium selection and show that the unique equilibrium exhibits two steady states. Coordination on high production may fail after a large transitory shock, pushing the economy in a quasi-permanent recession. Our calibrated model rationalizes various features of the Great Recession. Government spending, while generally harmful, can increase welfare when the economy is transitioning between steady states. Simple subsidies implement the efficient allocation.

Keywords: Coordination, Business cycles

JEL Classification: E32, D83, E62

Suggested Citation

Schaal, Edouard and Taschereau-Dumouchel, Mathieu, Coordinating Business Cycles (September 18, 2015). Available at SSRN: or

Edouard Schaal

New York University (NYU), Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Mathieu Taschereau-Dumouchel (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

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