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Coordinating business cycles

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  • Schaal, Edouard
  • Taschereau-Dumouchel, Mathieu

Abstract

We develop a quantitative theory of business cycles with coordination failures. Because of demand complementarities and increasing returns, firms seek to coordinate production and multiple equilibria arise. We use a global game approach to discipline equilibrium selection and show that the unique dynamic equilibrium exhibits multiple steady states. Coordination on high production may fail after a large transitory shock, pushing the economy in a quasi-permanent recession. Our calibrated model rationalizes various features of the 2007–2009 recession and its recovery. Government spending, while generally harmful, can increase welfare when the economy is transitioning between steady states. Other policy instruments are preferable to fix miscoordination.

Suggested Citation

  • Schaal, Edouard & Taschereau-Dumouchel, Mathieu, 2025. "Coordinating business cycles," Journal of Monetary Economics, Elsevier, vol. 155(S).
    • Handle: RePEc:eee:moneco:v:155:y:2025:i:s:s030439322500100x
    DOI: 10.1016/j.jmoneco.2025.103829
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Coordinating Business Cycles
      by Christian Zimmermann in NEP-DGE blog on 2015-08-07 18:25:42

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    4. George-Marios Angeletos, 2018. "Frictional Coordination," Journal of the European Economic Association, European Economic Association, vol. 16(3), pages 563-603.
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    6. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2016. "Expectations, stagnation and fiscal policy," Bank of Finland Research Discussion Papers 25/2016, Bank of Finland.
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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