Incomplete Information in Macroeconomics
or
Revisiting Coordination and Aggregate Demand
George-Marios Angeletos
MIT
Chicago: April 24, 2015
Angeletos
Inco Info, Coordination, and AD
1 / 27
The mysterious, seductive notions of...
coordination failure
aggregate demand
But what do they stand for?
– buzz words?
– formal meaning?
– measurement?
Angeletos
Inco Info, Coordination, and AD
2 / 27
State of the art (at least as of the previous handbook)
coordination failure = multiple equilibria
aggregate demand = gaps from flex-price allocations
Angeletos
Inco Info, Coordination, and AD
3 / 27
State of the art (at least as of the previous handbook)
coordination failure = multiple equilibria
aggregate demand = gaps from flex-price allocations
This chapter (and recent developments)

coordination failure 
aggregate demand
Angeletos
= strategic
uncertainty

Inco Info, Coordination, and AD
3 / 27
Roadmap
1
some clarifications and a unified perspective
2
global games
3
beauty contests
4
revisiting aggregate demand
5
macroeconomic policy
Angeletos
Inco Info, Coordination, and AD
4 / 27
Informational Frictions and Strategic Uncertainty
decision-theoretic uncertainty
I
beliefs of exogenous payoff fundamentals (preferences, technology, etc)
strategic uncertainty (SU)
I
beliefs of the actions of others (consumer spending, labor demand, etc)
my focus: SU
I
I
I
I
attacks the core of GE/macro mechanisms
formalizes friction in coordination
relaxes RE solution concept
delivers distinct testable implications
Angeletos
Inco Info, Coordination, and AD
5 / 27
Is this about Crises, or about Business Cycles?
standard practice:
I
macroeconomists prefer to interpret the business-cycle data and to guide
policy on the basis of unique-equil models
I
coordination failure has thus found limited application to the modern study of
business cycles, despite its central position in traditional Keynesian thinking
the alternative:
I
SU = unified method for studying coordination in business cycles and crises
Angeletos
Inco Info, Coordination, and AD
6 / 27
Revisiting Coordination Failure
before: sharp distinction between unique- and multiple-equil models
now: distinction becomes blurry, perhaps even irrelevant
I
SU selects a unique equilibrium in models with multiple equilibria
I
SU rationalizes “animal spirits” in models with unique equilibrium
recalibrating the “right” question:
I
the observables of a model (volatility, co-movement, etc)
I
not the determinacy of its solutions
Angeletos
Inco Info, Coordination, and AD
7 / 27
Global Games
incomplete info in games of “regime change”
I
coordination games that admit multiple equilibrium under complete info
I
natural context: crises
Angeletos
Inco Info, Coordination, and AD
8 / 27
Global Games
Morris and Shin → unique equilibrium
I
disturbing discontinuity: tiny noise can drastically alter predictions!
I
important: what matters is SU, not information about fundamentals
Angeletos
Inco Info, Coordination, and AD
9 / 27
Global Games
Morris and Shin → unique equilibrium
I
disturbing discontinuity: tiny noise can drastically alter predictions!
I
important: what matters is SU, not information about fundamentals
numerous applications.... [to be reviewed in the chapter]
Angeletos
Inco Info, Coordination, and AD
9 / 27
Global Games
Morris and Shin → unique equilibrium
I
disturbing discontinuity: tiny noise can drastically alter predictions!
I
important: what matters is SU, not information about fundamentals
numerous applications.... [to be reviewed in the chapter]
my prior work (with Hellwig, Pavan, Werning) → multiplicity hits back!
I
endogenous signals can “tame” SU and facilitate coordination
Angeletos
Inco Info, Coordination, and AD
9 / 27
Global Games
Morris and Shin → unique equilibrium
I
disturbing discontinuity: tiny noise can drastically alter predictions!
I
important: what matters is SU, not information about fundamentals
numerous applications.... [to be reviewed in the chapter]
my prior work (with Hellwig, Pavan, Werning) → multiplicity hits back!
I
endogenous signals can “tame” SU and facilitate coordination
Weinstein-Yildiz → generic uniqueness but “anything goes”
Angeletos
Inco Info, Coordination, and AD
9 / 27
Global games: take-home lessons
forget about multiplicity vs uniqueness!
the robust prediction of the theory is “excess sensitivity”
I
discontinuities
I
sharp reaction to noisy public signals
I
sunspots recast as higher-order beliefs (HOB)
Angeletos
Inco Info, Coordination, and AD
10 / 27
Global games: take-home lessons
forget about multiplicity vs uniqueness!
the robust prediction of the theory is “excess sensitivity”
I
discontinuities
I
sharp reaction to noisy public signals
I
sunspots recast as higher-order beliefs (HOB)
but also: details of information/communication matter a lot
I
knowledge vs common knowledge
I
e.g., stress tests, CDS markets
Angeletos
Inco Info, Coordination, and AD
10 / 27
Beauty Contests
incomplete info in games with linear best responses
I
settings that admit a unique equilibrium no matter the info structure
I
natural context: business cycles and asset markets in “normal times”
Angeletos
Inco Info, Coordination, and AD
11 / 27
Beauty Contests: Theory and Applications
Morris-Shin, Angeletos-Pavan, Bergemman-Morris
ai = Ei [(1 − α)θ + αA]
Woodford, Mankiw-Reis, Mackowiac-Wiederholt, Nimark,
Hellwig-Venkateswaran, Gaballo, Melosi, etc
pit = Eit [(1 − α)θt + αPt ]
Angeletos-La’O, Benhabib-Wang-Wen, Angeletos-Lian
yit = Eit [(1 − α)θt + αYt ]
cit = Eit [(1 − α)θt + αCt ]
Allen-Morris-Shin, Rondina-Walker, etc
pt = E¯it [θt + βpt+1 ]
related topics:
I
I
I
info aggregation (Grossman-Stiglitz, Hassan-Mertens, etc)
news/noise (Lorenzoni etc)
heterogeneous beliefs (Scheinkman-Xiong, Simsek, etc)
Angeletos
Inco Info, Coordination, and AD
12 / 27
Beauty Contests: take-home lessons
inertia of HOB to innovations in fundamentals → macro-level rigidity
I
e.g., nominal rigidity in response to monetary shocks,
or real rigidity in response to technology shocks
“noise” in HOB → sunspot-like volatility
I
dual role of public signals
contagion, propagation, waves of optimism and pessimism
Angeletos
Inco Info, Coordination, and AD
13 / 27
Revisiting Aggregate Demand
is “aggregate demand” a monetary or a real phenomenon?
where does nominal rigidity come from?
Angeletos
Inco Info, Coordination, and AD
14 / 27
AD and the NKPC
aggregate demand = gaps from flex-price allocations
discomforting facts:
I
disconnect between unemployment and inflation
I
the Great Recession and the “missing disinflation” puzzle
I
Bachmann et al: inflation expectations reduce consumer spending
I
a simple test of the NKPC (ongoing work)
F
in the theory: positive inflation innovations predict positive output gaps
F
in the data: the opposite is true!
maybe time to move past the NK formalization of AD???
Angeletos
Inco Info, Coordination, and AD
15 / 27
2:
IRFs VAR(u
VAR(u ,,ﬁﬁ ))
VAR on (u, π), CholeskyFigure
decomposition
Figure
2: IRFs
tt
tt
(a)
Share
Shock
innovation
in Share
unemployment
(a) Labor
Labor
Shock
Unemployment
Unemployment
Inflation
Inflation
0.3
0.3
00
0.2
0.2
-0.02
-0.02
0.1
0.1
-0.04
-0.04
00
20
20
40
40
Quarters
Quarters
60
60
80
80
-0.06
-0.06
20
20
(b)
Inflation Shock
Shock
(b) Inflation
40
40
Quarters
Quarters
6060
8080
60
60
80
80
innovation in inflation
Unemployment
Unemployment
0.3
0.3
0.2
0.2
0.1
0.1
0
0
20
20
40 Table602: Variance
80
20
40
Decomposition
40
60
80
20
40
Quarters
Quarters
Quarters
Quarters
Unemployment
Note: Shaded area: 68% HPDI.
Note: Shaded
area: 68% ÁHPDI.
ﬁ
Áu
t
t
1
4
8
20
Inflation
Inflation
0.25
0.25
0.2
0.2
0.15
0.15
0.1
0.1
0.05
0.05
0
0
100.00
[100.00,100.00]
95.15
[92.44,97.16]
79.72
[71.28,86.78]
47.60
[34.48,60.84]
0.00
[0.00,0.00]
4.85
[2.84,7.56]
20.28
[13.22,28.72]
52.40
[39.16,65.52]
Inflation Rate
Áu
t
Áﬁ
t
0.30
[0.03,1.18]
0.73
[0.17,2.46]
1.75
[0.38,5.11]
4.69
[0.86,12.03]
99.70
[98.82,99.97]
99.27
[97.54,99.83]
98.25
[94.89,99.62]
95.31
[87.97,99.14]
Note: 68% HPDI into brackets
Angeletos
Inco Info, Coordination, and AD
16 / 27
Beliefs and Nominal Rigidity
Woodford, Mankiw-Reis, Mackowiac-Wiederholt, etc
key mechanism: inertia of beliefs about endogenous outcomes (inflation)
Coibion-Gorodnichenko:
I
evidence of this kind of belief inertia
I
but disconnect from theory
ongoing work: use forecast data to quantify the theory
Angeletos
Inco Info, Coordination, and AD
17 / 27
Coibion and Gorodnichenko (2011)
Angeletos
Inco Info, Coordination, and AD
18 / 27
An Anatomy of the Data
VAR on
{Y , U, H, I , C , W , π, R, G , TFP, SP, VIX , ...}
“X shock” = shock that maximizes volatility of X at BC frequencies
I
method builds on Uhlig, Barsky-Sims, and others
inspect IRFs and variance contributions → anatomy of co-movement
Angeletos
Inco Info, Coordination, and AD
19 / 27
An Anatomy of the Data
U shock ≈ Y shock ≈ (I , H) shock
but very different from
I
π shock
I
TFP and PI /PC shocks
I
SP, VIX
evidence at odds with technology/news/noise/uncertainty shocks
an “invisible” TFP shock? a mysterious “demand shock”?
Angeletos
Inco Info, Coordination, and AD
20 / 27
The “Business-Cycle Shock”
Output
1
Consumption
0.5
0
0
-0.5
5 10 15 20
Inflation Rate
0.2
0
5 10 15 20
TFP
0
-1
1
5 10 15 20
Nom. Interest Rate
0
-0.2
1
-1
5 10 15 20
Angeletos
Quarters
-1
1
Investment
2
1
0
-1
0.5
0
5 10 15 20
Labor Productivity
-1
1
0
-0.2
-0.5
Real Interest Rate
5 10 15 20
1
Wages
0
5 10 15 20
P i /P c
0
0
-1
-1
5 10 15 20
5 10 15 20
Inco Info, Coordination,
Quarters
Quarters and AD
Unemployment
0.2
0
5 10 15 20
1
Hours (Total)
-1
4
2
0
-2
-4
5 10 15 20
1
Labor Share
0
5 10 15 20
Stock Prices
5 10 15 20
Quarters
-1
4
2
0
-2
-4
5 10 15 20
Stock Mkt Volat.
5 10 15 20
Quarters 21 / 27
Revisiting AD in the Theory
Angeletos and La’O (2013), Angeletos, Collard, Dellas (2014)
I
AD = coordination failure = gaps from complete-info outcomes
I
AD = confidence about short-run outlook
irrational? Akerlof and Shiller (2009), Gennaioli, Ma, and Shleifer (2015)
Angeletos
Inco Info, Coordination, and AD
22 / 27
Confronting the data: Angeletos, Collard and Dellas (2014)
textbook RBC/NK model augmented with “confidence shocks” does wonders
mechanism outperforms alternatives (I-shocks, C-shocks, news shocks, etc)
I
parsimonious calibration / pony races
I
medium-scale DSGE / structural estimations
“confidence shock” in the model mirrors
I
“mysterious demand shock” in the data
I
empirical measures of consumer confidence
I
Gennaioli-Ma-Shleifer evidence on CEO beliefs
Angeletos
Inco Info, Coordination, and AD
23 / 27
Pony Race: Confidence vs NK
NK with TFP plus...
Data
Our RBC
stddev(y )
stddev(h)
stddev(c)
stddev(i)
1.42
1.56
0.76
5.43
corr(c, y )
corr(i, y )
corr(h, y )
corr(c, h)
corr(i, h)
corr(c, i)
corr(y , y /h)
corr(h, y /h)
corr(y , sr )
corr(h, sr )
Angeletos
I shock
C shock
News
Monetary
1.42
1.52
0.76
5.66
1.24
1.18
0.86
7.03
1.15
0.97
0.95
7.04
1.29
1.02
0.84
7.24
1.37
1.44
0.77
6.20
0.85
0.94
0.88
0.84
0.82
0.74
0.77
0.92
0.85
0.34
0.99
0.47
0.42
0.82
0.80
-0.19
1.00
-0.17
0.37
0.75
0.77
-0.29
1.00
-0.33
0.43
0.84
0.86
-0.07
1.00
-0.13
0.73
0.90
0.84
0.24
0.99
0.35
0.08
-0.41
0.82
0.47
0.15
-0.37
0.85
0.47
0.37
-0.24
0.92
0.52
0.54
-0.10
0.92
0.49
0.61
0.13
0.94
0.65
0.20
-0.36
0.94
0.61
Inco Info, Coordination, and AD
24 / 27
Confidence shock (model) vs business-cycle shock (data)
4
Output
15
Investment
6
Hours Worked
Consumption
2
3
10
4
5
2
1.5
2
1
1
0.5
0
0
0
0
-0.5
-1
-5
-2
-10
-4
-1
-2
-3
-1.5
-2
-4
-15
1970 1980 1990 2000
Angeletos
-6
1970 1980 1990 2000
1970 1980 1990 2000
Inco Info, Coordination, and AD
1970 1980 1990 2000
25 / 27
VAR on models vs VAR on data
Output
Consumption
0.5
Investment
4
1
2
0
0
0
-1
1.5
5
10
15
Quarters
Hours Worked
20
-0.5
1
5
10
15
20
Quarters
Labor Productivity
10
15
Quarters
Inflation Rate
20
0.2
1
0.5
0
0
0
-0.5
5
-0.2
5
10
15
Quarters
Angeletos
20
-1
5
10
15
Quarters
Inco Info, Coordination, and AD
20
5
10
15
Quarters
20
26 / 27
Conclusion
strategic uncertainty = a method for studying, and quantifying, the role of
I
coordination failure
I
“mistakes” in expectations, “market psychology”
I
belief inertia, macro rigidity
I
“aggregate demand” beyond sticky prices
implications for macroeconomic policy
I
optimality of price stability
I
Ricardian equivalence, fiscal multipliers
I
stress tests
I
macro-prudential insurance
Angeletos
Inco Info, Coordination, and AD
27 / 27