Discussion Paper Details

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Title: Booms and Busts with Dispersed Information

Author(s): Kenza Benhima

Publication Date: January 2019

Keyword(s): Expectations, Imperfect Common Knowledge and Recessions

Programme Area(s): Monetary Economics and Fluctuations

Abstract: Dispersed information can generate booms and busts in economic activity. Boom-bust dynamics appear when firms are initially over-optimistic about demand due to a noisy private news. Consequently, they overproduce, which generates a boom and depresses their markups. Because the news is private, firms cannot relate these low markups to aggregate optimism. As low markups can also signal low demand, this overturns their expectations, generating a bust. We emphasize a novel role for imperfect common knowledge: dispersed information makes firms ignorant about their competitors' actions, which makes them confuse high noise-driven supply with low fundamental demand.

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Bibliographic Reference

Benhima, K. 2019. 'Booms and Busts with Dispersed Information'. London, Centre for Economic Policy Research.