Search complementarities, aggregate fluctuations, and fiscal policy

Journal article

We document five novel facts about the role of search effort in forming trading relationships among firms by combining a variety of micro and macro datasets. These facts strongly suggest the presence of search complementarities. To study the implications of these facts for aggregate fluctuations, we build a dynamic general equilibrium model, disciplined by our new firm-level evidence on search effort. The model matches key aspects of the macro and micro data that have remained unaccounted for by standard models, including the time-varying bimodal distribution of output and the strong, nonlinear propagation of shocks. Also, changes to the volatility of shocks have nonlinear effects on macroeconomic fluctuations that advance a novel interpretation of the Great Moderation. Finally, we provide a new account of the state-dependent effects of fiscal policy.

Authors: Fernandez-Villaverde, J; Mandelman, F; Yu, Y; Zanetti, F

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: Oxford University Press
• Journal: Review of Economic Studies
• Volume: 92
• Issue: 4
• Pages: 2502–2536
• Publication date: 2024-05-14
• Acceptance date: 2023-11-03
• DOI: 10.1093/restud/rdae053
• EISSN: 1467-937X
• ISSN: 0034-6527
• Language: English
• Keywords: macroeconomic volatility; government spending; search complementarities; aggregate fluctuations