Search Complementarities, Aggregate Fluctuations and Fiscal Policy

Jesus Fernandez-Villaverde, Federico Mandelman, Francesco Zanetti and Yang Yu
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Yang Yu: Shanghai University of Finance and Economics

No 386, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a model with search complementarities in the inter-firm matching process that entails two steady-state equilibria. An active equilibrium with strong partnership formation, large production, and low unemployment and a passive equilibrium with low partnership formation, low production, and high unemployment. Changes in fundamentals move the system between the two equilibria, generating large and persistent business cycle fluctuations. Suciently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive equilibrium while it plays a limited role in the active equilibrium. Fiscal policy has a non-monotonic effect on output in the passive equilibrium and the scal multiplier depends on the interplay between macroeconomic volatility and the magnitude of government spending.

Date: 2018
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:386

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