Self-fulfilling Business Cycles with Production Networks *

74 Pages Posted: 27 Oct 2020 Last revised: 8 Nov 2021

See all articles by Feng Dong

Feng Dong

Tsinghua University - Tsinghua University School of Economics and Management

Fei Zhou

Hong Kong Baptist University (HKBU) - Department of Economics

Date Written: August 12, 2020

Abstract

What is the role of production networks in inducing self-fulfilling business cycles? To answer this question, we have constructed a multisector business cycle model that features both inputoutput linkages and credit constraints. Our theoretical framework demonstrates that a single aggregate financial multiplier is sufficient to characterize equilibrium determinacy, which hinges on the production network structure. We find that tighter credit constraints in the upstream sector increase the likelihood of self-fulfilling equilibria. By conducting a quantitative assessment of the possibility of indeterminate equilibria in the US from 2000 to 2020, we discover that the economy became more prone to self-fulfilling fluctuations in the period of pre-2007.

Keywords: Endogenous Cycles, Indeterminacy, Production Networks, Credit Constraints, Financial Contagion JEL Classification: D24, E23, E32, E44

JEL Classification: D24, E23, E32, E44.

Suggested Citation

Dong, Feng and Zhou, Fei, Self-fulfilling Business Cycles with Production Networks * (August 12, 2020). Available at SSRN: https://ssrn.com/abstract=3672280 or http://dx.doi.org/10.2139/ssrn.3672280

Feng Dong (Contact Author)

Tsinghua University - Tsinghua University School of Economics and Management ( email )

Room 623, Lihua Building, School of Economics and
Beijing, Beijing 100084
China

Fei Zhou

Hong Kong Baptist University (HKBU) - Department of Economics ( email )

Kowloon Tong
Hong Kong

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