Search Complementarities, Aggregate Fluctuations, and Fiscal Policy

We document five novel facts about the role of search effort in forming trading relationships
among firms by combining a variety of micro and macro datasets. These facts strongly suggest
the presence of search complementarities. To study the implications of these facts for
aggregate fluctuations, we build a dynamic general equilibrium model, disciplined by our new
firm-level evidence on search effort. The model matches key aspects of the macro and micro
data that have remained unaccounted for by standard models, including the time-varying
bimodal distribution of output and the strong, nonlinear propagation of shocks. Also, changes
to the volatility of shocks have nonlinear effects on macroeconomic fluctuations that advance
a novel interpretation of the Great Moderation. Finally, we provide a new account of the statedependent
effects of fiscal policy.