Booms and Busts with Dispersed Information

Kenza Benhima

No 13444, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Dispersed information can generate booms and busts in economic activity. Boom-bust dynamics appear when firms are initially over-optimistic about demand due to a noisy private news. Consequently, they overproduce, which generates a boom and depresses their markups. Because the news is private, firms cannot relate these low markups to aggregate optimism. As low markups can also signal low demand, this overturns their expectations, generating a bust. We emphasize a novel role for imperfect common knowledge: dispersed information makes firms ignorant about their competitors' actions, which makes them confuse high noise-driven supply with low fundamental demand.

Keywords: Imperfect common knowledge; Expectations; Recessions (search for similar items in EconPapers)
JEL-codes: D52 D83 E32 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Booms and busts with dispersed information (2019)
Working Paper: Booms and Busts with dispersed information (2014)
Working Paper: Booms and Busts with dispersed information (2013)
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