Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination

148 Pages Posted: 4 Jul 2016

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

Multiple version iconThere are 2 versions of this paper

Date Written: May 7, 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.

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

Angeletos, George-Marios and Lian, Chen, Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination (May 7, 2016). MIT Department of Economics Working Paper No. 16-06, Available at SSRN: https://ssrn.com/abstract=2803668 or http://dx.doi.org/10.2139/ssrn.2803668

George-Marios Angeletos (Contact Author)

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Chen Lian

University of California, Berkeley ( email )

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