Editing New Keynesian economics (section)

==== Coordination failure ====
[[File:Coordination failure chart.svg|class=skin-invert-image|thumb|right|alt=Chart showing an equilibrium line at 45 degrees intersected three times by an s-shaped line.|In this model of coordination failure, a representative firm {{math|{{var|e}}{{sub|{{var|i}}}}}} makes its output decisions based on the average output of all firms ({{mvar|ē}}). When the representative firm produces as much as the average firm ({{math|1={{var|e}}{{sub|{{var|i}}}} = {{var|ē}}}}), the economy is at an equilibrium represented by the 45-degree line. The decision curve intersects with the equilibrium line at three equilibrium points. The firms could coordinate and produce at the optimal level of point B, but, without coordination, firms might produce at a less efficient equilibrium.<ref name="Cooper, Russel 1988 page 446">{{cite journal | last1 = Cooper | first1 = Russel | last2 = John | first2 = Andrew | year = 1988 | title = Coordinating Coordination Failures in Keynesian Models | url = http://cowles.yale.edu/sites/default/files/files/pub/d07/d0745-r.pdf| journal = The Quarterly Journal of Economics | volume = 103 | issue = 3| pages = 441–463 [446] | doi = 10.2307/1885539 | jstor = 1885539 }}</ref>]]
[[Coordination failure (economics)|Coordination failure]] was another important new Keynesian concept developed as another potential explanation for recessions and unemployment.<ref>Mankiw, N. Gregory (2008). "New Keynesian Economics". ''The Concise Encyclopedia of Economics''. Library of Economics and Liberty.<!--Access date removed – meaningless without a URL--></ref> In recessions a factory can go idle even though there are people willing to work in it, and people willing to buy its production if they had jobs. In such a scenario, economic downturns appear to be the result of coordination failure: The invisible hand fails to coordinate the usual, optimal, flow of production and consumption.<ref>Howitt, Peter (2002). "Coordination failures". In Snowdon, Brian; Vane, Howard (eds.). ''An Encyclopedia of Macroeconomics''. Cheltenham, UK: Edward Elgar Publishing. {{ISBN|978-1-84064-387-9}}. pp. 140–41.</ref> [[Russell W. Cooper (economist)|Russell Cooper]] and Andrew John's 1988 paper "Coordinating Coordination Failures in Keynesian Models" expressed a general form of coordination as models with multiple equilibria where agents could coordinate to improve (or at least not harm) each of their respective situations.<ref name="Cooper, Russel 1988 page 446"/><ref>Howitt (2002), p. 142</ref> Cooper and John based their work on earlier models including [[Peter A. Diamond|Peter Diamond]]'s 1982 [[Diamond coconut model|coconut model]], which demonstrated a case of coordination failure involving [[Matching theory (macroeconomics)|search and matching theory]].<ref>{{cite journal | last1 = Diamond | first1 = Peter A. | year = 1982 | title = Aggregate Demand Management in Search Equilibrium | journal = Journal of Political Economy | volume = 90 | issue = 5| pages = 881–894 | doi = 10.1086/261099 | jstor = 1837124 | hdl = 1721.1/66614 | s2cid = 53597292 | hdl-access = free }}</ref> In Diamond's model producers are more likely to produce if they see others producing. The increase in possible trading partners increases the likelihood of a given producer finding someone to trade with. As in other cases of coordination failure, Diamond's model has multiple equilibria, and the welfare of one agent is dependent on the decisions of others.<ref>Cooper and John (1988), pp. 452–53.</ref> Diamond's model is an example of a "thick-market [[externality]]" that causes markets to function better when more people and firms participate in them.<ref>Mankiw, N. Gregory; Romer, David (1991). ''New Keynesian economics 1''. Cambridge, Massachusetts: MIT Press. {{ISBN|0-262-13266-4}}. p. 8</ref> Other potential sources of coordination failure include [[self-fulfilling prophecies]]. If a firm anticipates a fall in demand, they might cut back on hiring. A lack of job vacancies might worry workers who then cut back on their consumption. This fall in demand meets the firm's expectations, but it is entirely due to the firm's own actions.