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Information, heterogeneity and market incompleteness

  • Graham, Liam
  • Wright, Stephen

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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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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