Booms and Busts with dispersed information

Kenza Benhima

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: This paper lays down a model where dispersed information generates booms and busts in economic activity. Boom-and-bust dynamics start when firms are initially over-optimistic about demand due to an aggregate noise shock in their signals. Consequently, they over-produce, which generates a boom. This however also depresses their mark-ups, which, to firms, signals low demand and overturns their expectations, generating a bust. This emphasizes a novel role for imperfect common knowledge: dispersed information makes firms ignorant about their competitors' actions, which makes them confuse high noise-driven supply with low fundamental demand. Boom-and-bust episodes are more dramatic when the aggregate noise shocks are more unlikely and when congestion effects are stronger.

Keywords: Imperfect Common Knowledge; Expectations; Recessions (search for similar items in EconPapers)
JEL-codes: D52 D83 E32 (search for similar items in EconPapers)
Pages: 38 pp. + tables and figures (total 45 pp.)
Date: 2013-08
New Economics Papers: this item is included in nep-bec, nep-cdm, nep-dge, nep-mac and nep-mic
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Downloads: (external link)
http://www.hec.unil.ch/deep/textes/13.11.pdf (application/pdf)

Related works:
Journal Article: Booms and busts with dispersed information (2019)
Working Paper: Booms and Busts with Dispersed Information (2019)
Working Paper: Booms and Busts with dispersed information (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:13.11

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