Multiple equilibria? Don’t panic!

This article provides a practical overview for applying the global games approach to solve models with multiple equilibria that are often used in discussions on financial and macroprudential policies. Global games offer a tractable approach to resolve multiple equilibria by introducing incomplete information, thereby yielding unique equilibrium predictions. The article proceeds along the lines of a simple regime change game with strategic complementarities. Starting from the canonical regime change game with homogeneous players, it extends the discussion to include heterogeneous groups of players and interlinkages across different institutions with different sets of players. These extensions highlight not only how strategic complementarities can amplify fragility across players and institutions but also how heterogeneity and interlinkages affects the design of micro and macroprudential policy interventions. Finally, the article briefly discusses the application of global games to dynamic coordination games.