Dynamic Coordination and the Optimal Stimulus Policies

Bernardo Guimaraes and Caio Machado

Economic Journal, 2018, vol. 128, issue 615, 2785-2811

Abstract: This article studies stimulus policies in a simple macroeconomic model featuring a dynamic coordination problem that arises from demand externalities and fixed costs of investment. In times of low economic activity, firms face low demand and hence have lower incentives for investing, which reinforces their low‐demand expectations. In a benchmark case with no shocks, the economy might get trapped in a low‐output regime and a social planner would be particularly keen to incentivise investment at times of low economic activity. However, this result vanishes once shocks are considered.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:wly:econjl:v:128:y:2018:i:615:p:2785-2811

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