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Université de Lausanne
Faculté des HEC
Département d'économétrie et d'économie politique

Cahier de recherches économiques du DEEP No. 17.15

Kenza Benhima


Booms and Busts with dispersed information

June, 2014

Abstract

This paper shows that dispersed information generates booms and busts in economic activity. Boom-and-bust dynamics appear when rms are initially over-optimistic about demand due to a noisy news. Consequently, they overproduce, which generates a boom. This depresses their mark-ups, which, to fi rms, signals low demand and overturns their expectations, generating a bust. This emphasizes a novel role for imperfect common knowledge: dispersed information makes fi rms ignorant about their competitors' actions, which makes them confuse high noise-driven supply with low fundamental demand. Boom-and-bust episodes are more dramatic when the aggregate noise shocks are more unlikely and when the degree of strategic substitutability in quantity-setting is stronger.

JEL Classification: E32, D83, D52

Keywords: Imperfect Common Knowledge, Expectations, Recessions

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