Microeconomic uncertainty and macroeconomic indeterminacy

Abstract

We are most grateful to Jorge Duran, R. Dos Santos Ferreira, L. Kaas and two anonymous referees for detailed and stimulating comments on these earlier versions. We also wish to thank (without implicating) R. Boucekkine, D. de la Croix, J.H.Drèze and participants at various seminars for thoughtful questions and comments. Financial support from the IAP IV and ARC programmes is gratefully acknowledged. AbstractThe paper proposes a stylized intertemporal macroeconomic model wherein the combination of decentralized trading and microeconomic uncertainty (taking the form of privately observed and uninsured idiosyncratic shocks) creates an information problem between agents and generates indeterminacy of the macroeconomic equilibrium. For a given value of the economic fundamentals, the economy admits a continuum of equilibria that can be indexed by the sales expectations of firms at the time of investment. The Walrasian allocation is one of these possible equilibria but it is reached only if firms are optimistic enough. With a weaker degree of optimism, equilibrium output, employment and real wages will be lower than in the Walrasian equilibrium. Moreover, the range of possible equilibria will depend positively on the wage elasticity of the labour supply and on the magnitude of the information problem between buyers and sellers (in our case, the variance of the idiosyncratic shocks).Stochastic simulations performed on a calibrated version of the model show that pure demand expectation shocks may generate business cycle statistics that are not inconsistent with the observed ones.

Search in the Product Market and the Real Business Cycle

“…Most papers introducing imperfections in the product market assume monopolistic wholesalers, as Blanchard and Giavazzi (2003), Messina (2006) or the recent DSGE literature (see for instance Christiano et al (2005) or Smets and Wouters (2003)). Alternatively, in Fagnart et al (2007), wholesalers experience privately observed and uninsured idiosyncratic shocks, which generates a sub-optimal equilibrium. But none of these approaches allow for bilateral relationships and negotiations between wholesalers and retailers.…”

Search in the product market and the real business cycle

“…Alternatively, in Fagnart et al (2007), wholesalers experience privately observed and uninsured idiosyncratic shocks, which generates a sub-optimal equilibrium. But none of these approaches allow for bilateral relationships and negotiations between wholesalers and retailers.…”