Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

Abstract

We develop a quantitative business cycle model with search complementarities in the interfirm 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.

State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters

“…As for multipliers away from the e ective lower bound, Michaillat (2014) establishes that government employment multipliers increase in times of high unemployment, Canzoneri et al (2016) and Faria-e-Castro (2019) show that the widening of credit spreads caused by nancial frictions increases government spending multipliers during recessions, Shen and Yang (2018) show that spending multipliers become countercyclical under downward nominal wage rigidity, Boehm and Pandalai-Nayar (2020) show that rm-level capacity constraints lead to scal multipliers that vary with utilization and Cloyne et al (2020) nd large scal multipliers when monetary policy is less activist. Fernández-Villaverde et al (2019) show that search complementarities between producing rms generate multiple equilibria and that the scal multiplier becomes state dependent if scal policy is su ciently powerful to move the economy across equilibria. In the study most related to ours, Michaillat and Saez (2019) conduct a normative analysis in a model with search frictions to show that the socially optimal stock of government spending can vary with unemployment.…”

Business cycle duration dependence and foreign recessions

“…important role) and the ending of recessions (i.e. no role) is in line with Fernández et al (2019). They show that the magnitude of government intervention (fiscal policy) is critical to foster economic recovery in the passive static equilibrium (associated with low output and high unemployment, read: ending of recession), while it plays a limited role in the active static equilibrium (high output and low unemployment, read: ending of expansion).…”

Untitled

“…When it comes to the neutral long-run effect on labor productivity, the LP approach shows that it is likely the outcome of compensating effects. The share of employment in routine (see Jaimovich and Siu, 2020;Fernández-Villaverde et al, 2019), and arguably less productive, tasks decreases in response to a negative permanent demand shock. This pushes up labor productivity but is compensated by a decrease in both capital intensity and TFP (arguably related to the negative permanent effects on investment).…”