A Traffic-Jam model of Recessions
Jennifer La'O ()
No 978, 2012 Meeting Papers from Society for Economic Dynamics
I study an economy in which firms are interconnected and there is strategic complementarity in production decisions. Firms use the output of other firms as inputs to their own production. Furthermore, they make production choices before knowing the demand they face. The simultaneity of these production decisions leads to a stable dynamic system under certain regions of the parameter space. If parameters move around, however, this leads to a bifurcation in which the system becomes unstable. In this region, small pertubations can lead to stop-and-go movements in which firm output remains low for many periods. That is, the economic system undergoes a recession which resembles a traffic jam.
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More papers in 2012 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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