Department of Economics
77 Massachusetts Avenue
Cambridge, MA 02139
NBER Working Papers and Publications
|May 2017||Dampening General Equilibrium: From Micro to Macro|
with George-Marios Angeletos: w23379
We argue that standard modeling practices often overstate the potency of general-equilibrium (GE) mechanisms. We formalize the notion that GE adjustment is weak, or that it takes time, by modifying an elementary Walrasian economy in two alternative manners. In one, we replace Rational Expectations Equilibrium with solution concepts that mimic Tâtonnement or Cobweb dynamics, Level-k Thinking, Reflective Equilibrium, and certain kinds of cognitive discounting. In the other, we maintain rational expectations but remove common knowledge of aggregate shocks and accommodate higher-order uncertainty. This permits us, not only to illustrate the broader plausibility of the notion that the GE adjustment may be weak or slow, but also to illustrate the sense in which our preferred approach—the one bas...
|October 2016||Forward Guidance without Common Knowledge|
with George-Marios Angeletos: w22785
How does the economy respond to news about future policies or future fundamentals? Workhorse models answer this question by imposing common knowledge of the news and of their likely effects. Relaxing this assumption anchors the expectations of future outcomes, effectively leading to heavier discounting of the future. By the same token, general-equilibrium mechanisms that hinge on forward-looking expectations, such as the Keynesian feedback loop between inflation and spending, are attenuated. We establish these insights within a class of games (“dynamic beauty contests”) which nest the New Keynesian model along with other applications. We next show how these insights help resolve the forward-guidance puzzle and offer a rationale for the front-loading of fiscal stimuli.
|June 2016||Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination|
with George-Marios Angeletos: w22297
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...