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Booms and Busts with dispersed information

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  • Kenza Benhima
Abstract
This paper shows that dispersed information generates booms and busts in economic activity. Boom-and-bust dynamics appear when rms are initially over-optimistic about demand due to a noisy news. Consequently, they overproduce, which generates a boom. This 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 the degree of strategic substitutability in quantity-setting is stronger.

Suggested Citation

  • Kenza Benhima, 2014. "Booms and Busts with dispersed information," Cahiers de Recherches Economiques du Département d'économie 17.15, Université de Lausanne, Faculté des HEC, Département d’économie.
    • Handle: RePEc:lau:crdeep:17.15
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    Cited by:

    1. Kenza Benhima & Isabella Blengini, 2020. "Optimal Monetary Policy when Information is Market-Generated," The Economic Journal, Royal Economic Society, vol. 130(628), pages 956-975.
    2. Schaal, Edouard & Taschereau-Dumouchel, Mathieu, 2023. "Herding through booms and busts," Journal of Economic Theory, Elsevier, vol. 210(C).
    3. Edouard Schaal & Mathieu Taschereau-Dumouchel, 2020. "Herding cycles," Economics Working Papers 1714, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2023.
    4. Gemmi, Luca, 2024. "Rational overoptimism and limited liability," Journal of Monetary Economics, Elsevier, vol. 143(C).
    5. Gene Ambrocio, 2020. "Rational exuberance booms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 263-282, January.

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    More about this item

    Keywords

    Imperfect Common Knowledge; Expectations; Recessions;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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