SELF-FULFILLING BUSINESS CYCLES WITH PRODUCTION NETWORKS

Abstract

What is the role of production networks in inducing self-fulfilling business cycles? We construct a multisector business cycle model that features both input–output linkages and credit constraints. Our theoretical framework demonstrates that a single aggregate financial multiplier is sufficient to characterize equilibrium determinacy, which hinges on the network structure. By quantitatively assessing the possibility of indeterminate equilibria in the United States from 2000 to 2020, we discover that the economy was prone to self-fulfilling fluctuations in the period of pre-2007.