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The more we know, the less we agree: Higher-order expectations and public announcements

  • Péter Kondor

    (Central European University)

Polarization of opinions after public announcement is widely observed, but often considered to be inconsistent with Bayesian learning. I show that this is not the case in environments where higher-order expectations play a role. I characterize informational structures where public announcement leads to polarization in all higher-order expectations, but not in first-order expectations. To illustrate the economic consequences, I modify two workhorse models of asymmetric information. I show in a Morris-Shin(1998) model that more disclosure of public information can increase the chance of successful currency attacks. I show in a dynamic Grossman-Stiglitz(1980) model that hectic trading around public announcements is consistent with common priors and Bayesian learning.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1018.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1018
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  1. George-Marios Angeletos & Ivan Werning, 2004. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," NBER Working Papers 11015, National Bureau of Economic Research, Inc.
  2. Adam, Klaus, 2004. "Optimal Monetary Policy with Imperfect Common Knowledge," CEPR Discussion Papers 4594, C.E.P.R. Discussion Papers.
  3. Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: unique equilibrium and transparency," Journal of International Economics, Elsevier, vol. 58(2), pages 429-450, December.
  4. Péter Kondor, 2005. "Rational Trader Risk," FMG Discussion Papers dp533, Financial Markets Group.
  5. Evans, Martin D.D. & Lyons, Richard K., 2008. "How is macro news transmitted to exchange rates?," Journal of Financial Economics, Elsevier, vol. 88(1), pages 26-50, April.
  6. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  7. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  8. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2007. "Wall Street and Silicon Valley: A Delicate Interaction," NBER Working Papers 13475, National Bureau of Economic Research, Inc.
  9. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity, and the Timing of Attacks," Econometrica, Econometric Society, vol. 75(3), pages 711-756, 05.
  10. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
  11. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
  12. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  13. Christian Hellwig & Arijit Mukherji & Aleh Tsyvinski, 2005. "Self-Fulfilling Currency Crises: The Role of Interest Rates," NBER Working Papers 11191, National Bureau of Economic Research, Inc.
  14. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
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