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Coordinating Business Cycles

Author

Listed:
  • Mathieu Taschereau-Dumouchel

    (University of Pennsylvania - Wharton)

  • Edouard Schaal

    (New York University)

Abstract

We develop a quantitative theory of business cycles with coordination failures. Because of a standard aggregate demand externality, firms want to coordinate production. The presence of a non-convex capacity decision generates multiple equilibria under complete information. We use a global game approach to show that, under incomplete information, the multiplicity of equilibria disappears to give rise to a unique equilibrium with two stable steady states. The economy exhibits coordination traps: after a negative shock of sufficient size or duration, coordination on the good steady state is harder to achieve, leading to quasi-permanent recessions. In our calibration, the coordination channel improves on the neoclassical growth model in terms of business cycle asymmetries and skewness. The model also accounts for features of the 2007-2009 recession and its aftermath. Government spending is harmful in general as the coordination problem magnifies the crowding out. It can, however, increase welfare -- without nominal rigidities -- when the economy is about to transition to the bad steady state. Simple subsidies implement the efficient allocation.

Suggested Citation

  • Mathieu Taschereau-Dumouchel & Edouard Schaal, 2015. "Coordinating Business Cycles," 2015 Meeting Papers 178, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:178
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    References listed on IDEAS

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    5. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
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    7. Steiner, Jakub, 2008. "Coordination cycles," Games and Economic Behavior, Elsevier, vol. 63(1), pages 308-327, May.
    8. Mathevet, Laurent & Steiner, Jakub, 2013. "Tractable dynamic global games and applications," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2583-2619.
    9. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity, and the Timing of Attacks," Econometrica, Econometric Society, vol. 75(3), pages 711-756, May.
    10. George-Marios Angeletos & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks," Discussion Papers 1497, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Coleman, Wilbur II, 2000. "Uniqueness of an Equilibrium in Infinite-Horizon Economies Subject to Taxes and Externalities," Journal of Economic Theory, Elsevier, vol. 95(1), pages 71-78, November.
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    Blog mentions

    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

    Citations

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    Cited by:

    1. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2016. "Expectations, Stagnation and Fiscal Policy," CEPR Discussion Papers 11428, C.E.P.R. Discussion Papers.
    2. Jan Eeckhout & Ilse Lindenlaub, 2015. "Unemployment cycles," IFS Working Papers W15/26, Institute for Fiscal Studies.
    3. Muellbauer, John, 2016. "Macroeconomics and Consumption," CEPR Discussion Papers 11588, C.E.P.R. Discussion Papers.
    4. Acharya, Sushant & Bengui, Julien & Dogra, Keshav & Wee, Shu Lin, 2017. "Slow recoveries and unemployment traps: monetary policy in a time of hysteresis," Staff Reports 831, Federal Reserve Bank of New York, revised 01 Aug 2018.
    5. Vito Gala & Hongxun Ruan & Joao Gomes, 2018. "The Decline in Corporate Investment," 2018 Meeting Papers 269, Society for Economic Dynamics.
    6. Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1641-1692.
    7. Ryan Chahrour & Rosen Valchev, 2017. "International Medium of Exchange: Privilege and Duty," Boston College Working Papers in Economics 934, Boston College Department of Economics.
    8. repec:eee:macchp:v2-1065 is not listed on IDEAS
    9. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    10. Szkup, Michal, 2017. "Multiplier effect and comparative statics in global games of regime change," MPRA Paper 82729, University Library of Munich, Germany.
    11. George-Marios Angeletos, 2017. "Frictional Coordination," NBER Working Papers 24178, National Bureau of Economic Research, Inc.
    12. Sushant Acharya & Julien Bengui & Keshav Dogra & Shu Lin Wee, 2018. "Escaping Unemployment Traps," 2018 Meeting Papers 543, Society for Economic Dynamics.
    13. George-Marios Angeletos & Chen Lian, 2017. "Dampening General Equilibrium: From Micro to Macro," NBER Working Papers 23379, National Bureau of Economic Research, Inc.

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