Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

Sep 2019 | 880

Authors: Jesus Fernandez-Villaverde, Francesco Zanetti Federico Mandelman, Yang Yu


We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently 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 static equilibrium, while it plays a limited role in the active static equilibrium.

JEL Codes: C63, C68, E32, E37, E44, G12

Keywords: Aggregate fluctuations, strategic complementarities, macroeconomic volatility, government spending


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