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When Can Decision Makers Learn from Financial Market Prices?

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  • CHRISTOPH SIEMROTH

Abstract

I analyze a general setting where a policymaker needs information that financial market traders have in order to implement optimal policy, and prices can potentially reveal this information. Policy decisions, in turn, affect asset values. I derive a condition for the existence of fully revealing equilibria in competitive financial markets, which identifies all situations where learning from prices for policy purposes works. I discuss the possibility of using market information for banking supervision and central banking, and the general problem of asset design. I also demonstrate that some corporate prediction markets are ill‐designed, and show how to fix it.

Suggested Citation

  • Christoph Siemroth, 2021. "When Can Decision Makers Learn from Financial Market Prices?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1523-1552, September.
    • Handle: RePEc:wly:jmoncb:v:53:y:2021:i:6:p:1523-1552
    DOI: 10.1111/jmcb.12799
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    References listed on IDEAS

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    Cited by:

    1. Bergemann, Dirk & Ottaviani, Marco, 2021. "Information Markets and Nonmarkets," CEPR Discussion Papers 16459, C.E.P.R. Discussion Papers.

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