Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

Jesús Fernández-Villaverde, Federico Mandelman, Yang Yu and Francesco Zanetti

The Review of Economic Studies, 2025, vol. 92, issue 4, 2502-2536

Abstract: 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 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:92:y:2025:i:4:p:2502-2536.

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