Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

We document five novel facts about the role of search effort in forming trading relationships among firms by combining a variety of micro and macro datasets. These facts strongly suggest the presence of search complementarities. To study the implications of these facts for aggregate fluctuations, we build a dynamic general equilibrium model, disciplined by our new firm-level evidence on search effort. The model matches key aspects of the macro and micro data that have remained unaccounted for by standard models, including the time-varying bimodal distribution of output and the strong, nonlinear propagation of shocks. Also, changes to the volatility of shocks have nonlinear effects on macroeconomic fluctuations that advance a novel interpretation of the Great Moderation. Finally, we provide a new account of the state-dependent effects of fiscal policy.

Keywords: Search complementarities, aggregate fluctuations, macroeconomic volatility, government spending.

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

Suggested Citation: Suggested Citation

Fernández-Villaverde, Jesús and Mandelman, Federico and Yu, Yang and Zanetti, Francesco, Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (May 30, 2022). Available at SSRN: https://ssrn.com/abstract=4128516 or http://dx.doi.org/10.2139/ssrn.4128516