Decentralizatiohn, Communication, and the Origins of Fluctuations
We 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, we rule out every known source of...
| Main Authors: | , |
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| Format: | Working Paper |
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Cambridge, MA: Department of Economics, Massachusetts Institute of Technology
2012
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| Online Access: | http://hdl.handle.net/1721.1/71559 |
| _version_ | 1811084210359762944 |
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| author | Angeletos, George-Marios La'O, Jennifer |
| author_facet | Angeletos, George-Marios La'O, Jennifer |
| author_sort | Angeletos, George-Marios |
| collection | MIT |
| description | We 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, we rule out every known source of macroeconomic volatility. And yet, we 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. In line with Keynesian thinking, these fluctuations may be attributed to “coordination failures” and “animal spirits”. They may also take the form of “fads”, or waves of optimism and pessimism that spread in the population like contagious diseases. Yet, these ostensibly pathological phenomena emerge at the heart of the neoclassical paradigm and require neither a deviation from rationality, nor multiple equilibria, nor even a divergence between private and social motives. |
| first_indexed | 2024-09-23T12:47:03Z |
| format | Working Paper |
| id | mit-1721.1/71559 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T12:47:03Z |
| publishDate | 2012 |
| publisher | Cambridge, MA: Department of Economics, Massachusetts Institute of Technology |
| record_format | dspace |
| spelling | mit-1721.1/715592019-04-12T15:42:58Z Decentralizatiohn, Communication, and the Origins of Fluctuations Angeletos, George-Marios La'O, Jennifer Business Cycles Shocks Dispersed Information Stabilization Policy Animal Spirits Market Psychology Higher-Order Beliefs We 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, we rule out every known source of macroeconomic volatility. And yet, we 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. In line with Keynesian thinking, these fluctuations may be attributed to “coordination failures” and “animal spirits”. They may also take the form of “fads”, or waves of optimism and pessimism that spread in the population like contagious diseases. Yet, these ostensibly pathological phenomena emerge at the heart of the neoclassical paradigm and require neither a deviation from rationality, nor multiple equilibria, nor even a divergence between private and social motives. 2012-07-09T00:05:34Z 2012-07-09T00:05:34Z 2011-05-04 Working Paper http://hdl.handle.net/1721.1/71559 Working paper, Massachusetts Institute of Technology, Dept. of Economics;11-09 An error occurred on the license name. An error occurred getting the license - uri. application/pdf Cambridge, MA: Department of Economics, Massachusetts Institute of Technology |
| spellingShingle | Business Cycles Shocks Dispersed Information Stabilization Policy Animal Spirits Market Psychology Higher-Order Beliefs Angeletos, George-Marios La'O, Jennifer Decentralizatiohn, Communication, and the Origins of Fluctuations |
| title | Decentralizatiohn, Communication, and the Origins of Fluctuations |
| title_full | Decentralizatiohn, Communication, and the Origins of Fluctuations |
| title_fullStr | Decentralizatiohn, Communication, and the Origins of Fluctuations |
| title_full_unstemmed | Decentralizatiohn, Communication, and the Origins of Fluctuations |
| title_short | Decentralizatiohn, Communication, and the Origins of Fluctuations |
| title_sort | decentralizatiohn communication and the origins of fluctuations |
| topic | Business Cycles Shocks Dispersed Information Stabilization Policy Animal Spirits Market Psychology Higher-Order Beliefs |
| url | http://hdl.handle.net/1721.1/71559 |
| work_keys_str_mv | AT angeletosgeorgemarios decentralizatiohncommunicationandtheoriginsoffluctuations AT laojennifer decentralizatiohncommunicationandtheoriginsoffluctuations |