Expectations, Coordination Failures and Macro Crises

Deep recessions and disruptions in credit markets have caused worries and motivated research for a long time. They still challenge macroeconomic analysis. We rst map some observable features of a set of such episodes, trying to nd common elements of the whole family of events. The dierent macroeconomic experiences show a high degree of heterogeneity. Given that, what emerges as a central element of crises is their character as a life-changing episode for the people concerned, which remains in their memory and triggers a search for lessons, as they frustrate past expectations and force widespread reevaluations of wealth and income prospects. Critical periods involve dynamics at dierent time scales, as economic changes with lasting implications take place in an environment of dramatic day-to-day variability. Crises tend to be associated with breaks in the growth trends of the economies in question, in a way that may surprise not only agents inclined to eccentric behavior, but also those who held beliefs based on prevalent economic analysis. Macroeconomic disturbances of this sort raise strong questions about the pertinence, and the logic, of usual rational expectations assumptions and modeling practices.