Imperfect coordination in DSGE models: The resurgence of Keynes in mainstream macroeconomics

Abstract

The imperfect coordination of expectations and actions is a central theme running through Keynes’s General Theory. Incorporating this theme into mainstream macroeconomics, however, has proved to be a difficult endeavour. In particular, attempts to accommodate coordination failures within Dynamic Stochastic General Equilibrium (DSGE) models through multiple equilibria and “dynamic” indeterminacy, while promising in the 1990s, were gradually abandoned in the 2000s. Since then, the “New Keynesian” framework has come to dominate macroeconomic modelling. And since the coordination of agents is not at issue in this latter framework, mainstream macroeconomics has seemed to leave the coordination theme out of its focus, if not its scope. In this paper, we challenge this perception and argue that the coordination theme is actually alive and well. We especially present two recent research programmes which, while belonging to the DSGE paradigm, give pride of place to coordination failures and share a common objective: providing, within the class of DSGE models, an alternative to the New Keynesian framework that would involve the most important ideas emerging from Keynes’s General Theory.