Social Interaction Models and Keynes' Macroeconomics

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The central concepts of Keynes’ macroeconomic theories concerning the behavior of labor markets, aggregate demand, and asset pricing can be formulated as special cases of a general social interaction model.

In its simplest form this model analyzes a system of interacting identical agents, each of whom controls the level of an action, and all of whom have the same utility functions trading off the effort required by the action with the monetary incentives for it. When the incentives include an interaction term involving the action levels of the other agents, the equilibrium outcome is in general Pareto-inefficient for the interacting agents, and multiple equilibria are possible. The expectations that lie at the heart of Keynes’ conception of macroeconomic equilibrium concern the behavior of other individuals rather than concrete forecasts of the concrete path of prices.

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