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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. Kristoffer Nimark, 2013. "Man-Bites-Dog Business Cycle," Working Papers 700, Barcelona Graduate School of Economics.
  2. Venky Venkateswaran, 2011. "Heterogeneous Information and Labor Market Fluctuations," 2011 Meeting Papers 1292, Society for Economic Dynamics.
  3. Daniel R. Carroll & Eric R. Young, 2009. "A note on sunspots with heterogeneous agents," Working Paper 0906, Federal Reserve Bank of Cleveland.
  4. Kenza Benhima, 2013. "Booms and Busts with dispersed information," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 13.11, Université de Lausanne, Faculté des HEC, DEEP.
  5. 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.
  6. Brad Baxter & Liam Graham & Stephen Wright, 2007. "The Endogenous Kalman Filter," Birkbeck Working Papers in Economics and Finance 0719, Birkbeck, Department of Economics, Mathematics & Statistics.
  7. Eric R. Young & Ponpoje Porapakkarm, 2008. "Information Heterogeneity in the Macroeconomy," 2008 Meeting Papers 67, Society for Economic Dynamics.
  8. 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.
  9. 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.

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