This paper characterizes the monetary equilibria of an economy with commodity and labour contracts. If government policy is not “too variable,” there may exist an equilibrium with predetermined wages and prices. In this equilibrium, observed changes in the money supply to finance government purchases have persistent real effects. The paper also provides theoretical support for an inverse relationship between the degree of indexation in contracts and the persistence of policy effects.

We study the selection of an equilibrium for coordination games: symmetric, simultaneous move, complete information games which have multiple, Pareto-ranked Nash equilibria. We design and experiment to explore regularities in the observed outcomes for this class of games. With replication, we find that the Nash equilibrium concept accurately predicts the strategies chosen by players in these games. However, the equilibrium outcome is not always the Pareto-dominant equilibrium so that coordination failures can arise. Moreover, we find that altering the payoffs of a dominated strategy can influence the selection of a Nash equilibrium. Our results are consistent with a modified version of Harsanyi's tracing procedure in which players initially place some positive probability that their opponent is a cooperative player even though the cooperative strategy may be dominated by another strategy.

This paper investigates two aspects of the macroeconomic consequences of market participation decisions of imperfectly competitive firms. First, can there exist multiple, Pareto-ranked Nash equilibria indexed by the level of market participation? That is, can there exist both thin and thick market equilibria? Second, can the variations in the degree of competition that stem from shocks to preferences and technologies help to understand observed fluctuations in the macroeconomy? This paper is part of an ongoing research program intended to understand the macroeconomic implications of the coordination of economic activities in model economies without complete and/or competitive markets. In such environments, the fundamental theorems of welfare economics do not apply and it is quite possible for the economy to have multiple, Pareto-ranked equilibria. Low-welfare equilibria represent situations in which individual agents, acting noncooperatively, are unable to successfully coordinate their activities and reach a preferred equilibrium-this is termed a coordination failure. In equilibria of this type, there are $100 bills lying on the sidewalk but it takes the effort of more than one individual (i.e., coordination) to reap these gains! Our model relates to two important strands of the literature on coordination failures. First are model economies in which the deviation from the Arrow-Debreu paradigm arises from the market power of sellers (see, for example, Oliver Hart, 1982). In these models, the number of active firms is usually taken to be exogenous. Our contribution is, in part, to allow the number of firms to be determined by the costs and benefits of market participation. This allows us to relate the degree of competition in the economy to variations in fundamentals like technology and preferences in addition to exogenous (but self-fulfilling) variations in expectations. Second, our model represents another example of a participation externality in which the gains to participating in an activity, such as entering a market, depend on the number of other agents participating as well. The papers by Peter Diamond (1982), Chatterjee (1988), and M. Pagano (1987; 1988) explore market participation externalities of a different variety. In Diamond's work, these externalities arise through the matching process, while Chatterjee and Pagano (1987) explore the risk-reducing effects of large markets. Similar externalities are found in the industrial organization literature on networks, as in Michael Katz and Carl Shapiro (1985). The model explored in this paper highlights a participation externality arising from the interaction of imperfectly competitive firms.1 tDiscussants: Robert E. Hall, Stanford University; Peter Diamond, MIT; Olivier J. Blanchard, MIT.

This note responds to Christian Bayer (2009). Cooper and Willis (2004), hereafter CW, find the aggregate nonlinearities reported in Ricardo Caballero and Eduardo Engel (1993) and Caballero, Engel, and John Haltiwanger (1997) reflect mismeasurement of the employment gap, not nonlinearities in plant-level adjustment. Bayer concludes the CW result is not robust to alternative aggregate shock processes. We concur, but argue that the nonlinearity created by mismeasurement does not disappear. Instead, it is directly related to the level of the aggregate shock. The CW findings are robust for the natural case of unobserved gaps.

We study the inferences about labor adjustment costs obtained by the gap methodology of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the policy function of a manufacturing plant is assumed to depend on the gap between a target and the current level of employment. We Þnd that their rejection of the quadratic cost of adjustment model, based upon evidence of nonlinear hazard functions, may not be justiÞed. Instead these nonlinearities may reßect difficulties measuring the gap. Thus it appears that the gap methodology, as currently employed, may be unable to identify the costs of labor adjustment. ∗We are grateful to seminar participants at Boston University, the University of British Columbia, University of Texas at Austin and the 2000 CMSG conference at McMaster University for comments and suggestions. Discussions with John Haltiwanger and Daniel Hamermesh were much appreciated. The authors thank the NSF for Þnancial support. The views expressed herein are solely those of the authors and do not necessarily reßect the views of the Federal Reserve Bank of Kansas City, the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

A Comment on the Economics of Labor Adjustment: Mind the Gap: Rejoinder by Russell Cooper and Jonathan L. Willis. Published in volume 94, issue 4, pages 1245-1247 of American Economic Review, September 2004

Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell (1961): a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable. This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks.

This paper focuses on the importance of strategic complementarities in agents' payoff functions as a basis for macroeconomic coordination failures. Strategic complementarities arise when the optimal strategy of an agent depends positively upon the strategies of the other agents. We first analyze an abstract game and find that multiple equilibria and a multiplier process may arise when strategic complementarities are present. Often these equilibria can be Pareto ranked. We then place additional economic content on the analysis of this game by considering strategic complementarities arising from production functions, matching technologies, and commodity demand functions in a multisector, imperfectly competitive economy.