A Traffic Jam Theory of Recessions
AbstractI construct a dynamic economy in which agents are interconnected: the output produced by one agent is the consumption good of another. I show that this economy can generate recessions which resemble traffic jams. At the micro level, each individual agent waits for his own income to increase before he increases his spending. However, his spending behavior affects the income of another agent. Thus, the spending behavior of agents during recessions resembles the stop-and-go behavior of vehicles during traffic jams. Furthermore, these traffic jam recessions are not caused by large aggregate shocks. Instead, in certain parts of the parameter space, a small pertubation or individual shock is amplified as its impact cascades from one agent to another. These dynamics eventually result in a stable recessionary equilibrium in which aggregate output, consumption, and employment remain low for many periods. Thus, much like in traffic james, agents cannot identify any large exogenous shock that caused the recession. Finally, I provide conditions under which these traffic jam recessions are most likely to occur.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 412.
Date of creation: 2013
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-16 (All new papers)
- NEP-CMP-2013-11-16 (Computational Economics)
- NEP-DGE-2013-11-16 (Dynamic General Equilibrium)
- NEP-MIC-2013-11-16 (Microeconomics)
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