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Information, heterogeneity and market incompleteness

Graham, L. and Wright, Stephen (2010) Information, heterogeneity and market incompleteness. Journal of Monetary Economics 57 (2), pp. 164-174. ISSN 0304-3932.

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Official URL: http://dx.doi.org/10.1016/j.jmoneco.2009.12.005

Abstract

Information is “market-consistent” if agents only use market prices to infer the underlying states of the economy. This paper applies this concept to a stochastic growth model with incomplete markets and heterogeneous agents. The economy with market-consistent information can never replicate the full information equilibrium, and there are substantial differences in impulse responses to aggregate productivity shocks. These results are robust to the introduction of a noisy public signal and aggregate financial markets. We argue that the principle of market-consistent information should be applied to any model with incomplete markets.

Item Type: Article
Keyword(s) / Subject(s): Imperfect information, higher order expectations, Kalman filter, dynamic general equilibrium
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 26 Jan 2011 15:57
Last Modified: 17 Apr 2013 12:18
URI: http://eprints.bbk.ac.uk/id/eprint/1995

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