Decentralization, Communication, and the Origins of Fluctuations
George-Marios Angeletos and
Jennifer La'O
No 17060, NBER Working Papers from National Bureau of Economic Research, Inc
Abstract:
We consider a class of convex, competitive, neoclassical economies in which agents are rational; the equilibrium is unique; there is no room for randomization devices; and there are no shocks to preferences, technologies, endowments, or other fundamentals. In short, we rule out every known source of macroeconomic volatility. And yet, we show that these economies can be ridden with large and persistent fluctuations in equilibrium allocations and prices. These fluctuations emerge because decentralized trading impedes communication and, in so doing, opens the door to self-fulfilling beliefs despite the uniqueness of the equilibrium. In line with Keynesian thinking, these fluctuations may be attributed to "coordination failures" and "animal spirits". They may also take the form of "fads", or waves of optimism and pessimism that spread in the population like contagious diseases. Yet, these ostensibly pathological phenomena emerge at the heart of the neoclassical paradigm and require neither a deviation from rationality, nor multiple equilibria, nor even a divergence between private and social motives.
JEL-codes: D52 D83 E32 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-bec and nep-cba
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)
Downloads: (external link)
http://www.nber.org/papers/w17060.pdf (application/pdf)
Related works:
Working Paper: Decentralization, Communication, and the Origins of Fluctuations (2011) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:17060
Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w17060
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().