This paper introduces an aggregate demand externality into a model of irreversible investment. The central result of the paper establishes the mechanism in which increases in uncertainty can lead to suboptimal recessions. These inefficient outcomes occur even if agents are allowed to coordinate...

Models of coordination failure have equilibria that are not first-best because of externalities. Usually these models display multiple equilibria. We provide an example of how the existence of some economic institutions and government policies can be explained as mechanisms for internalizing...