Description

A central aspect of the global current recession is the crisis of confidence, understood as a worsening of expectations and a rise in uncertainty. This document explains the synchrony and severity of the crisis with a model that allows the existence of multiple equilibria, coordination failures and uncertainty affecting the decision making process. In this type of model, which includes uncertainty and irreversibilities, the choice is no longer between spending and not spending, but rather between spending, not spending, or waiting. Thus, facing an uncertainty shock that is common to all, households and firms paralyze their spending, causing a collapse in demand. This type of model is consistent with actual facts of the current crisis: unprecedented synchrony of the crisis, global uncertainty and distrust were particularly acute towards the end of last year and the severe drop in demand was concentrated largely in durable goods.