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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Paper provided by EconWPA in its series Macroeconomics with number
9809016.
Length: 43 pages Date of creation: 30 Sep 1998 Date of revision:
30 Sep 1998 Handle: RePEc:wpa:wuwpma:9809016
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Find related papers by JEL classification: C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Caballero, Ricardo J, 1992.
"A Fallacy of Composition,"
American Economic Review,
American Economic Association, vol. 82(5), pages 1279-92, December.
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