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Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

Jesus Fernandez-Villaverde (), Francesco Zanetti (), Federico Mandelman () and Yang Yu

No 880, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.

Keywords: Aggregate fluctuations; strategic complementarities; macroeconomic volatility; government spending (search for similar items in EconPapers)
JEL-codes: C63 C68 E32 E37 E44 G12 (search for similar items in EconPapers)
Date: 2019-09-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
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Related works:
Working Paper: Search Complementarities, Aggregate Fluctuations,and Fiscal Policy (2019) Downloads
Working Paper: Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (2019) Downloads
Working Paper: Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (2019) Downloads
Working Paper: Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (2019) Downloads
Working Paper: Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (2019) Downloads
Working Paper: Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (2019) Downloads
Working Paper: Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (2019) Downloads
Working Paper: Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (2019) Downloads
Working Paper: Search Complementarities, Aggregate Fluctuations and Fiscal Policy (2018) Downloads
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