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Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination

Listed author(s):
  • George-Marios Angeletos
  • Chen Lian

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 22297.

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Date of creation: Jun 2016
Handle: RePEc:nbr:nberwo:22297
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