Equilibrium Selection in Games with Macroeconomic Complementarities

We apply the stochastic evolutionary approach of equilibrium selection to macroeconomic models in which a complementarity at the macro level is present. These models often exhibit multiple Pareto-ranked Nash equilibria, and the best response-correspondence of an individual increases with a measure of the aggregate state of the economy. Our main theoretical result shows how the equilibrium that is singled out by the evolutionary dynamics is directly related to the underlying externality that creates the multiplicity problem in the underlying macroeconomic stage game. We also provide clarifying examples from the macroeconomic literature. <BR><BR>