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In search of economic reality under the veil of financial markets

Author Info

Listed author(s):
  • Josef Falkinger

Abstract

This paper presents a general equilibrium model with technological uncertainty, financial markets and imperfect information. The future consists of uncertain environments that are more or less clearly distinguishable (measurable). This limits the possibilities of specialization and diversification. Households have no direct information about the productivity of risky technologies. They rely on the information conveyed by the set of financial products provided by the financial sector, the pay-off promises of the products and their prices. Unreliable information-processing by financial markets leads to deception of households. As a result, extending the space spanned by financial products is not unambiguously good. This suggests a policy rule which ties financial innovations to the experience base of the economy.

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Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 154.

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Date of creation: Apr 2014
Handle: RePEc:zur:econwp:154
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Keywords: Real and financial economics; incomplete knowledge; risk and uncertainty; financial crisis; size of financial sector; responsible finance;

Find related papers by JEL classification:

  • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
  • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • G01 - Financial Economics - - General - - - Financial Crises
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
  • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

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  1. Markus K. Brunnermeier & Yuliy Sannikov, 2014. "A Macroeconomic Model with a Financial Sector," American Economic Review, American Economic Association, vol. 104(2), pages 379-421, February.
  2. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
  3. Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654.
  4. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-751, August.
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  6. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  7. Ricardo J. Caballero, 2010. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 85-102, Fall.
  8. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  9. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
  10. Robin Greenwood & David Scharfstein, 2013. "The Growth of Finance," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 3-28, Spring.
  11. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
  12. Cerreia-Vioglio, Simone & Maccheroni, Fabio & Marinacci, Massimo & Montrucchio, Luigi, 2013. "Ambiguity and robust statistics," Journal of Economic Theory, Elsevier, vol. 148(3), pages 974-1049.
    • Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Luigi Montrucchio, 2011. "Ambiguity and Robust Statistics," Working Papers 382, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  13. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
  14. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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Cited by:

  1. Habib, Michel Antoine, 2015. "Multifaceted Transactions, Incentives, and Organizational Form," CEPR Discussion Papers 10432, C.E.P.R. Discussion Papers.
  2. Studer, Sabrina & Falkinger, Josef & Zhao, Yingnan, 2015. "Explaining structural changes towards and within the financial sector," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113004, Verein für Socialpolitik / German Economic Association.

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