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Local Complementarities and Aggregate Fluctuations

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  • Randal J. Verbrugge

    (VPI&SU)

Abstract

Accumulating microeconomic evidence points both to firm level adjustment lumpiness and to the significant influence of idiosyncratic disturbances. Do these matter for aggregate fluctuations, or do their effects largely vanish upon aggregation? This paper explores the implications of local strategic complementarities and firm-level adjustment lumpiness for aggregate fluctuations. It shows that small (industry-level), serially uncorrelated disturbances which are independent across industries can generate large, persistent aggregate fluctuations, even in the absence of aggregate shocks. This general amplification and propagation mechanism is explored in the context of a simple dynamic general equilibrium model. In this model, economy-wide fluctuations are driven entirely by independent industry-specific disturbances which are propagated via output market interactions. Results are encouraging: many key qualitative features of macroeconomic fluctuations are captured even by this simple model, indicating that this class of models, which builds upon microeconomic features that characterize the economy, surely merits further investigation.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9809016.

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Length: 43 pages
Date of creation: 30 Sep 1998
Date of revision: 30 Sep 1998
Handle: RePEc:wpa:wuwpma:9809016

Note: Type of Document - pdf; prepared on IBM PC; pages: 43; figures: included
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Web page: http://128.118.178.162

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Cited by:
  1. Laura Veldkamp & Justin Wolfers, 2006. "Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement," Working Papers 06-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Randal J. Verbrugge, 1998. "A Framework for Studying Economic Interactions (with applications to corruption and business cycles)," Game Theory and Information 9809006, EconWPA, revised 01 Oct 1998.

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