Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination

148 Pages Posted: 7 Jun 2016 Last revised: 5 Jun 2021

See all articles by George-Marios Angeletos

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Chen Lian

University of California, Berkeley

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Date Written: June 2016

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.

Suggested Citation

Angeletos, George-Marios and Lian, Chen, Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination (June 2016). NBER Working Paper No. w22297, Available at SSRN: https://ssrn.com/abstract=2790694

George-Marios Angeletos (Contact Author)

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Chen Lian

University of California, Berkeley ( email )

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