Dynamic Coordination and the Optimal Stimulus Policies

Abstract

This article studies stimulus policies in a simple macroeconomic model featuring a dynamic coordination problem that arises from demand externalities and fixed costs of investment. In times of low economic activity, firms face low demand and hence have lower incentives for investing, which reinforces their low-demand expectations. In a benchmark case with no shocks, the economy might get trapped in a low-output regime and a social planner would be particularly keen to incentivise investment at times of low economic activity. However, this result vanishes once shocks are considered. Models with time-varying fundamentals and timing frictions have been used to study other dynamic coordination problems. Frankel and Pauzner (2002) employ a similar structure in order to analyse the timing of neighbourhood change. Guimaraes (2006) studies speculative attacks. Levin (2009) studies the persistence of group behaviour in a collective reputation model. He and Xiong (2012) build a model of debt runs. Guimaraes and Pereira (2017) analyse how payoff heterogeneity affects these models. Guimaraes and Pereira (2016) study welfare in a model of network externalities.

Dynamic coordination with timing frictions: Theory and applications

“…The more resources spent, the more likely the new plant will be ready to operate. Guimaraes and Machado (2018) show that the constant-subsidy result also applies to this setting.…”

“…Kiyotaki (1988) shows that in a model with monopolistic competition and some locally increasing returns to scale, there are multiple equilibria. Guimaraes and Machado (2018) embed a simple model that captures those insights in a dynamic framework with timing frictions.…”

“…The strategy here follows Guimaraes and Machado (2018) and is similar to the one employed in Section 2.3. Suppose the planner is following the optimal plan and consider the following deviation: change δ τ 0 to δ at time τ for an infinitesimal period dt and keep future choices for every realization of the Brownian path in the future unchanged.…”

A Model of the Confidence Channel of Fiscal Policy

“…In Chamley (), a preference (demand) shock might lead firms to choose a less efficient but flexible technology (which can be interpreted as inaction). In Guimaraes and Machado (), there is complete information but owing to timing frictions in investment decisions, expected demand plays a key role. None of those models study how government spending might affect confidence or sentiments.…”

Who matters in dynamic coordination problems?

“…More closely related to ours, Guimaraes and Machado (2018) and Schaal and Taschereau-Dumouchel (2018) study optimal subsidy policies in macroeconomic models subject to coordination failures, but do not allow for any heterogeneity. The first employs an homogeneous-agents model -otherwise similar to ours -to examine the impact of investment subsidies in regime change.…”