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Information, heterogeneity and market incompleteness in the stochastic growth model

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  • Liam Graham
  • Stephen Wright
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    Abstract

    We provide a microfounded account of imperfect information in the stochastic growth model which dramatically changes the properties of the model. We describe heterogenous households that acquire information about aggregates through their participation in markets. If markets are incomplete, household information will be imperfect. We solve the model taking account of the infinite regress of expectations that this lack of information implies. We derive analytical and numerical results to show that imperfect information can significantly change the properties of the model: under virtually all calibrations the impact response of consumption to a positive aggregate technology shock is negative.

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    File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0704.pdf
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    Bibliographic Info

    Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0704.

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    Date of creation: Nov 2007
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    Handle: RePEc:san:cdmacp:0704

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    Postal: Department of Economics, University of St. Andrews, Fife KY16 9AL
    Phone: 01334 462420
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    Web page: http://www.st-andrews.ac.uk/cdma
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    Related research

    Keywords: imperfect information; higher order expectations; Kalman filter; dynamic general equilibrium;

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    References

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    1. Yongsung Chang & Sun-Bin Kim, 2003. "From individual to aggregate labor supply : a quantitative analysis based on a heterogeneous agent macroeconomy," Working Paper 03-05, Federal Reserve Bank of Richmond.
    2. 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.
    3. 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.
    4. 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.
    5. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
    6. Aoki, Kosuke, 2002. "Optimal Commitment Policy Under Noisy Information," CEPR Discussion Papers 3370, C.E.P.R. Discussion Papers.
    7. Pearlman, Joseph & Currie, David & Levine, Paul, 1986. "Rational expectations models with partial information," Economic Modelling, Elsevier, vol. 3(2), pages 90-105, April.
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    Cited by:
    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.

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