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Information, heterogeneity and market incompleteness

  • Liam Graham
  • Stephen Wright

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
Handle: RePEc:kie:kieliw:1503
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