Mathieu Taschereau-Dumouchel () and
No 723, 2014 Meeting Papers from Society for Economic Dynamics
We propose a model of coordination failures for business cycles in which agents learn to coordinate over time. The economy features an aggregate demand externality that leads to multiple equilibria under complete information. Under incomplete information, a group of informed agents receive private signals about the fundamentals of the economy, while a group of uninformed agents only observe past public realizations of aggregate demand. The economy takes a long time to recover from recessions because their coordination capital is destroyed: agents lose their ability to coordinate on the good outcome. In a recovery, informed agents wait for the uninformed to take action before resuming production, while uninformed agents infer the level of the fundamental by observing the endogenously low level of demand. As a result, uninformed agents keep pessimistic beliefs about the fundamental for an extended period of time and downturns become very protracted. The equilibrium is inefficient and we characterize optimal policy interventions.
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More papers in 2014 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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