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Incomplete Information in Macroeconomics

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  • Angeletos, G.-M.
  • Lian, C.

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, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, Elsevier.
  • Handle: RePEc:eee:macchp:v2-1065
    DOI: 10.1016/bs.hesmac.2016.04.011
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    Cited by:

    1. Régis Barnichon & Geert Mesters, 2019. "Identifying modern macro equations with old shocks," Economics Working Papers 1659, Department of Economics and Business, Universitat Pompeu Fabra.
    2. repec:eee:ecanpo:v:58:y:2018:i:c:p:121-130 is not listed on IDEAS

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    Keywords

    Informational frictions; Higher-order beliefs; Strategic uncertainty; Coordination failure; Animal spirits; Aggregate demand; Business cycles; Financial crises; Global games; Beauty contests; C7; D8; E1; E3; E4; G1;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets

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