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Information, heterogeneity and market incompleteness

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  • Graham, Liam
  • Wright, Stephen

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 2 (March)
Pages: 164-174

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Handle: RePEc:eee:moneco:v:57:y:2010:i:2:p:164-174

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Imperfect information Higher order expectations Kalman filter Dynamic general equilibrium;

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Citations

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Cited by:
  1. Nimark, Kristoffer P, 2013. "Man-bites-dog Business Cycles," CEPR Discussion Papers 9517, C.E.P.R. Discussion Papers.
  2. Daniel R. Carroll & Eric R. Young, 2009. "A note on sunspots with heterogeneous agents," Working Paper 0906, Federal Reserve Bank of Cleveland.
  3. Giusto, Andrea, 2014. "Adaptive learning and distributional dynamics in an incomplete markets model," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 317-333.
  4. Eric R. Young & Ponpoje Porapakkarm, 2008. "Information Heterogeneity in the Macroeconomy," 2008 Meeting Papers 67, Society for Economic Dynamics.
  5. John Barrdear, 2014. "Peering into the mist: social learning over an opaque observation network," Discussion Papers 1409, Centre for Macroeconomics (CFM).
  6. Brad Baxter & Liam Graham & Stephen Wright, 2007. "The Endogenous Kalman Filter," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 0719, Birkbeck, Department of Economics, Mathematics & Statistics.
  7. Venky Venkateswaran, 2011. "Heterogeneous Information and Labor Market Fluctuations," 2011 Meeting Papers 1292, Society for Economic Dynamics.
  8. Kenza Benhima, 2013. "Booms and Busts with dispersed information," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 13.11, Université de Lausanne, Faculté des HEC, DEEP.
  9. Baxter, Brad & Graham, Liam & Wright, Stephen, 2011. "Invertible and non-invertible information sets in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 295-311, March.
  10. Manoj Atolia & Ryan Chahrour, 2013. "Intersectoral Linkages, Diverse Information, and Aggregate Dynamics in a Neoclassical Model," Boston College Working Papers in Economics 832, Boston College Department of Economics.

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