MACRO: How to Select Equilibrium Selection Devices from Data; Professor Yang Yu (Shanghai Jiao Tong University)

Abstract

Multiple equilibria models are widely used in economics, but selecting a specific equilibrium remains challenging. This study proposes an empirical method to identify the most empirically plausible equilibrium selection devices among three prominent options in the macroeconomic literature: global games, history dependence, and sunspot shocks. Using time series data, I analyze the distribution of economic outcomes conditional on current and past economic fundamentals. When applied to multiple equilibria models of the labor market, the method favors global games and history dependence as the preferred equilibrium selection devices for explaining observed labor market dynamics, depending on how the data are filtered.