Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

84 Pages Posted: 7 Oct 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 4 versions of this paper

Date Written: August 2019

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 static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static 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 static equilibrium, while it plays a limited role in the active static equilibrium.

Keywords: Aggregate fluctuations, government spending, Macroeconomic volatility, strategic complementarities

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 (August 2019). CEPR Discussion Paper No. DP13950, Available at SSRN: https://ssrn.com/abstract=3464474

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Federico Mandelman

Federal Reserve Bank of Atlanta ( email )

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Yang Yu

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

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Shanghai, 200433
China

Francesco Zanetti

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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