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Information, heterogeneity and market incompleteness

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  • Liam Graham
  • Stephen Wright

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:kie:kieliw:1503

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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. 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.
  2. Nimark, Kristoffer P, 2013. "Man-bites-dog Business Cycles," CEPR Discussion Papers 9517, C.E.P.R. Discussion Papers.
  3. 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.
  4. Eric R. Young & Ponpoje Porapakkarm, 2008. "Information Heterogeneity in the Macroeconomy," 2008 Meeting Papers 67, Society for Economic Dynamics.
  5. 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.
  6. Venky Venkateswaran, 2011. "Heterogeneous Information and Labor Market Fluctuations," 2011 Meeting Papers 1292, Society for Economic Dynamics.
  7. 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.
  8. Daniel R. Carroll & Eric R. Young, 2009. "A note on sunspots with heterogeneous agents," Working Paper 0906, Federal Reserve Bank of Cleveland.
  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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