Macroeconomics Complementaries

This project continues research on the dynamic behavior of model economies with complementarities. The key to these models is that the 'activity' of one agent is an increasing function of the aggregate level of activity in the economy. For example, in such models production by individual firms or search for jobs by the unemployed for jobs depends on the overall level of economic activity. These models have been able to provide insights into a variety of phenomena important to understanding business cycles, growth and financial interactions. The multiplicity of equilibria that arise in these models creates the possibility of coordination failures in that the economy can become 'stuck' at an inferior equilibrium. No single agent, acting alone, can move the economy to a preferred equilibrium outcome. This is consistent with observed, prolonged periods of low activity, such as the Great Depression, where it appears that the economy shifted to an alternative low activity equilibrium. This grant permits the investigator to extend past theoretical and empirical work to focus on machine replacement and changes in the seasonal pattern of production in the automobile and related sectors during the 1920s and 1930s. The most interesting aspect of the automobile producers experience during this period was an effort by the Roosevelt Administration and the Automobile Manufacturers Association, in the early 1930s to move the shutdown period for retooling from the end of the year to the late summer. This could be an example of a coordination failure. Automobile producers all synchronized retooling in December, but retooling earlier in the year would permit greater production smoothing. The project will also study the importance of entry and exit over the course of business cycles in imperfectly competitive economies. The last area of work concerns the study of the aggregate implications of bank runs and the problem of designing optimal deposit insurance schemes.