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Booms and Busts with dispersed information

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  • Kenza Benhima

Abstract

This paper lays down a model where dispersed information generates booms and busts in economic activity. Boom-and-bust dynamics start when firms are initially over-optimistic about demand due to an aggregate noise shock in their signals. Consequently, they over-produce, which generates a boom. This however also 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 congestion effects are stronger.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 13.11.

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Length: 38 pp. + tables and figures (total 45 pp.)
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:lau:crdeep:13.11

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: Imperfect Common Knowledge; Expectations; Recessions;

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