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Information, heterogeneity and market incompleteness

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Author Info
Liam Graham
Stephen Wright

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Abstract

We provide a microfounded account of imperfect information in a dynamic general equilibrium model by describing heterogeneous households that acquire information only through their participation in markets. Thus incomplete markets will imply incomplete information. We solve the model taking full account of the infinite regress of expectations, and show that the properties of the model change dramatically. Under virtually all calibrations the impact response of consumption to a positive aggregate technology shock is negative. If households observe a noisy public signal in addition to the information they obtain from markets, consumption responds to shocks sluggishly

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1503.

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Length: 44 pages
Date of creation: Mar 2009
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Handle: RePEc:kie:kieliw:1503

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Related research
Keywords: imperfect information; higher order expectations; Kalman Filter; dynamic general equilibrium;

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Find related papers by JEL classification:
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
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  3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December. [Downloadable!] (restricted)
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  6. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June. [Downloadable!]
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  7. Pearlman, Joseph G., 1992. "Reputational and nonreputational policies under partial information," Journal of Economic Dynamics and Control, Elsevier, vol. 16(2), pages 339-357, April. [Downloadable!] (restricted)
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  11. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October. [Downloadable!] (restricted)
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  12. Campbell, John Y., 1994. "Inspecting the mechanism: An analytical approach to the stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 463-506, June. [Downloadable!] (restricted)
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  13. Fatih Guvenen, 2007. "An empirical investigation of labor income processes," IFS Working Papers W07/13, Institute for Fiscal Studies. [Downloadable!]
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  14. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March. [Downloadable!] (restricted)
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  15. Guido Lorenzoni, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Svensson, Lars E. O. & Woodford, Michael, 2004. "Indicator variables for optimal policy under asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 661-690, January. [Downloadable!] (restricted)
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  17. Aoki, Kosuke, 2006. "Optimal commitment policy under noisy information," Journal of Economic Dynamics and Control, Elsevier, vol. 30(1), pages 81-109, January. [Downloadable!] (restricted)
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  18. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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