Booms and Busts with dispersed information

Kenza Benhima

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: This paper shows that dispersed information generates booms and busts in economic activity. Boom-and-bust dynamics appear when rms are initially over-optimistic about demand due to a noisy news. Consequently, they overproduce, which generates a boom. This depresses their mark-ups, which, to firms, signals low demand and overturns their expectations, generating a bust. This emphasizes 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. Boom-and-bust episodes are more dramatic when the aggregate noise shocks are more unlikely and when the degree of strategic substitutability in quantity-setting is stronger.

Keywords: Imperfect Common Knowledge; Expectations; Recessions (search for similar items in EconPapers)
JEL-codes: D52 D83 E32 (search for similar items in EconPapers)
Pages: 50 pp.
Date: 2014-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://hec.unil.ch/attachments/deep/series/2016/17.15.pdf (application/pdf)

Related works:
Journal Article: Booms and busts with dispersed information (2019)
Working Paper: Booms and Busts with Dispersed Information (2019)
Working Paper: Booms and Busts with dispersed information (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:17.15

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