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
Forward guidance—and macroeconomic policy more generally—relies on shifting expectations, not only of future policy, but also of future economic outcomes such as income and inflation. These expectations matter through general-equilibrium mechanisms. Recasting these expectations and these mechanisms in terms of higher-order beliefs reveals how standard policy predictions hinge on the assumption of common knowledge. Relaxing this assumption anchors expectations and attenuates the associated general-equilibrium effects. In the context of interest, this helps lessen the forward-guidance puzzle, as well as the paradox of flexibility. More broadly, it helps operationalize the idea that policy makers may find it hard to shift expectations of economic outcomes even if they can easily shift expecta...
|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...