Self-fulfilling Business Cycles with Production Networks *

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.