TY  - JOUR
AU  - Angeletos,George-Marios
AU  - La'O,Jennifer
TI  - Decentralization, Communication, and the Origins of Fluctuations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17060
PY  - 2011
Y2  - May 2011
UR  - http://www.nber.org/papers/w17060
L1  - http://www.nber.org/papers/w17060.pdf
N1  - Author contact info:
George-Marios Angeletos
Department of Economics
MIT E52-251
50 Memorial Drive
Cambridge, MA  02142-1347
Tel: 617/452-3859
Fax: 617/253-1330
E-Mail: angelet@mit.edu

Jennifer La'O
University of Chicago
Booth School of Business
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-9768
E-Mail: jenlao@chicagobooth.edu
AB  - 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.
ER  -