Work

Coordinating business cycles

Year: 2025

Type: article

Abstract: We develop a quantitative theory of business cycles with coordination failures. Because of demand complementarities, firms seek to coordinate production and multiple equilibria arise. We use a global game approach to discipline equilibrium selection and show that the unique equilibrium exhibits two 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 Great Recession. Government spending, while generally harmful, can increase welfare when the economy is transitioning between steady states. Simple subsidies implement the efficient allocation.

Source: Journal of Monetary Economics

DOI: 10.1016/j.jmoneco.2025.103829

Authors: Edouard Schaal, Mathieu Taschereau-Dumouchel

Institutions: Centre de Recerca en Economia Internacional, Cornell University

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,660

Funders: Centres de Recerca de Catalunya, Generalitat de Catalunya, Ministerio de Economía y Competitividad