Multiple Equilibria and Persistence in Aggregate Fluctuations
AbstractThis paper explores the impact of incomplete markets and strong complementarities on the time series properties of aggregate activity. We consider an economy which consists of a large number of industries whose production functions both are nonconvex and exhibit localized technological complementarities. The productivity of each industry at t is determined by the production decisions of technologically similar industries at t - 1. No markets exist to coordinate production decisions. This feature implies that aggregate output dynamics for the model are quite different from those predicted by the associated Arrow-Debreu economy. First, multiple stochastic equilibria exist in aggregate activity. These equilibria are distinguished by differences in the mean and the variance of output. Second, output movements are persistent as aggregate productivity shocks indefinitely affect real activity by shifting the economy across equilibria. As a result, the model can exhibit periods of boom and depression.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3629.
Date of creation: Feb 1991
Date of revision:
Publication status: published as The American Economic Review, Vol. 81, No. 2, pp.70-74, (May 1991).
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Other versions of this item:
- Durlauf, Steven N, 1991. "Multiple Equilibria and Persistence in Aggregate Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 70-74, May.
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