Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination
148 Pages Posted: 4 Jul 2016
Date Written: May 7, 2016
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: Informational frictions, higher-order beliefs, strategic uncertainty, coordination failure, animal spirits, aggregate demand, business cycles, financial crises, global games, beauty contests
JEL Classification: C7, D8, E1, E3, E4, G1
Suggested Citation: Suggested Citation