Friday, August 27, 2010
What Happened to Coordination Failure Models?
In the 1980s, there was a Keynesian research program using coordination failure models. Early on there was John Bryant's model, and Peter Diamond has a neat search model with multiple equilibria. Russ Cooper worked on this too. People took those ideas, and what was known about sunspot equilibria, and developed dynamic models with intrinsic aggregate uncertainty, that in some forms (I'm thinking of work by Farmer and Guo, for example) could replicate features of the data. Woodford did some work in this literature, as did Benhabib, and others. Those were coherent market-clearing competitive general equilibrium models that, one could argue, captured ideas in Keynes's General Theory. One could not only fit the models to data, but extract features that could in principle be used to argue for or against their empirical plausibility. Why did that stuff get shoved aside in favor of the New Keynesian sticky-price model?