Decentralization, Communication, And The Origins Of Fluctuations

The authors consider a class of convex, competitive, neoclassical economies in which agents are rational; the equilibrium is unique; there is no room for randomization devices; and there are no shocks to preferences, technologies, endowments, or other fundamentals. In short, they rule out every known source of macroeconomic volatility. And yet, they show that these economies can be ridden with large and persistent fluctuations in equilibrium allocations and prices. These fluctuations emerge because decentralized trading impedes communication and, in so doing, opens the door to self-fulfilling beliefs despite the uniqueness of the equilibrium.

Provided by: National Bureau of Economic Research Topic: Data Management Date Added: May 2011 Format: PDF

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