Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

78 Pages Posted: 3 Sep 2019 Last revised: 2 Jun 2023

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Federico Mandelman

Federal Reserve Bank of Atlanta

Yang Yu

Shanghai University of Finance and Economics - School of Economics

Francesco Zanetti

University of Oxford; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

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Date Written: August 2019

Abstract

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.

Suggested Citation

Fernández-Villaverde, Jesús and Mandelman, Federico and Yu, Yang and Zanetti, Francesco, Search Complementarities, Aggregate Fluctuations, and Fiscal Policy (August 2019). NBER Working Paper No. w26210, Available at SSRN: https://ssrn.com/abstract=3446520

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Federico Mandelman

Federal Reserve Bank of Atlanta ( email )

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Yang Yu

Shanghai University of Finance and Economics - School of Economics ( email )

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Francesco Zanetti

University of Oxford ( email )

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Oxford, Oxfordshire OX1 4AU
United Kingdom

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

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