Working Paper: NBER ID: w22297
Authors: Georgemarios Angeletos; Chen Lian
Abstract: This chapter studies how incomplete information helps accommodate frictions in coordination, leading to novel insights on the joint determination of expectations and macroeconomic outcomes. We review and synthesize recent work on global games, beauty contests, and their applications. We elaborate on the distinct effects of strategic uncertainty relative to fundamental uncertainty. We demonstrate the potential fragility of workhorse macroeconomic models to relaxations of common knowledge; the possibility of operationalizing the notions of “coordination failure” and “animal spirits” in a manner that unifies unique- and multiple-equilibrium models; and the ability of incomplete information to offer a parsimonious explanation of important empirical regularities. We provide a general treatment of these ideas, as well as specific applications in the context of business cycles, financial crises, and asset pricing.
Keywords: Incomplete Information; Macroeconomics; Coordination Frictions; Expectations; Business Cycles; Financial Crises
JEL Codes: C7; D8; E01; E3; E40; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Incomplete information (D82) | Coordination (P11) |
| Coordination (P11) | Macroeconomic outcomes (E19) |
| Incomplete information (D82) | Macroeconomic outcomes (E19) |
| Lack of common knowledge (D80) | Equilibrium outcomes (D50) |
| Exogenous shocks (F41) | Agents' expectations (D84) |
| Agents' expectations (D84) | Macroeconomic outcomes (E19) |