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Macroeconomics Lecture Notes

Macroeconomics Lecture Notes

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Published by: Naveed khan on Jun 17, 2010
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Given those definitions, we can establish the following:

1. Strategic complementarity is necessary for multiple SNE.
Proof: Equilibrium requires that the reaction function ei(e) intersect the
45 degree line, so that ei = e. For this to occur more than once, since
the slope of the 45 degree line is one, the slope of the reaction function
must exceed one. As we worked out in the definition of strategic com-
plementarity, dei

de = −V12

V11 and hence is positive and greater than one if
V12 > |V11| > 0. Hence strategic complementarity is necessary. Note that
it is not sufficient.



2. If there are spillovers at equilibrium, then it is inefficient.
Proof: (Technical) At equilibrium, V1 = 0. If V2 > 0, then V1 + V2 > 0,
which implies we are not at the SCE, which is efficient. (Intuitive) If all
players benefit by higher actions, then equilibrium can’t be efficient.

3. If there are positive spillovers, then there is some point e0 such that e0 > e
and e0 is a SCE (i.e. it is efficient).
Proof: Follows from previous proposition. At some bigger e, the reaction
function will cross the 45 degree line to obtain a SCE, given the positive

4. If there are positive spillovers everywhere, we can Pareto-rank the SNE;
higher actions are preferred.
Proof: dV(ei(e),e)

de = V1 + V2 = V2 hence all agents payoffs are increasing

in all agents actions.

5. If ei(e) = e over an interval and there are positive spillovers, then there is
a continuum of Pareto-rankable equilibria.
Proof: follows from previous proposition

6. Strategic complementarity is necessary and sufficient for the existence of
Proof: will be omitted here, since it is long and involved. The gist is that
if there are strategic complementarities, a shock to agent i’s payoff will
cause him to change his strategy, which will cause others to changes their
strategies in the same direction, which causes agent i to further change his
strategy, and so on. This is vaguely comparable to the standard IS-LM
Keynesian multiplier story, where consuming an extra dollar means giving
someone else income, which means more consumption, which means giving
someone else income, and so on.

The paper goes on to shoehorn much of the rest of the literature on coordi-
nation failure into this framework. Both the Murphy, Shleifer and Vishny model
and the Diamond model are examples.

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