Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

78 Pages Posted: 4 May 2019

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Federico Mandelman

Federal Reserve Bank of Atlanta

Yang Yu

Shanghai University of Finance and Economics - School of Economics

Francesco Zanetti

University of Oxford

Multiple version iconThere are 2 versions of this paper

Date Written: 2019-05-01

Abstract

We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active equilibrium with strong joint venture formation, large output, and low unemployment coexists with a passive equilibrium with low joint venture formation, low output, and high unemployment.

Changes in fundamentals move the system between the two equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive equilibrium, while it plays a limited role in the active equilibrium.

Keywords: aggregate fluctuations, strategic complementarities, macroeconomic volatility, government spending

JEL Classification: C63, C68, E32, E37, E44, G12

Suggested Citation

Fernández-Villaverde, Jesús and Mandelman, Federico and Yu, Yang and Zanetti, Francesco, Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (2019-05-01). FRB Atlanta Working Paper No. 2019-9. Available at SSRN: https://ssrn.com/abstract=3382365 or http://dx.doi.org/10.29338/wp2019-09

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Philadelphia, PA 19104
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National Bureau of Economic Research (NBER)

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Federico Mandelman

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Yang Yu

Shanghai University of Finance and Economics - School of Economics ( email )

777 Guoding Road
Shanghai, 200433
China

Francesco Zanetti

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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