Multiple Equilibria and Persistence in Aggregate Fluctuations
This 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.
|Date of creation:||Feb 1991|
|Publication status:||published as The American Economic Review, Vol. 81, No. 2, pp.70-74, (May 1991).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
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.:
- Romer, Paul M, 1986.
"Increasing Returns and Long-run Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 94(5), pages 1002-1037, October.
- Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
- Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-1026, October.
- Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1988. "Industrialization and the Big Push," NBER Working Papers 2708, National Bureau of Economic Research, Inc.
- Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
- Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
- P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
- Russell Cooper, 1987. "Dynamic Behavior of Imperfectly Competitive Economies with Multiple Equilibria," NBER Working Papers 2388, National Bureau of Economic Research, Inc.
- Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-528, June. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3629. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.