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In search of economic reality under the veil of financial markets

  • Josef Falkinger

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
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Handle: RePEc:zur:econwp:154
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  1. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
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  6. 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 709-51, August.
  7. Yuliy Sannikov & Markus Brunnermeier, 2012. "A Macroeconomic Model with a Financial Sector," 2012 Meeting Papers 507, Society for Economic Dynamics.
  8. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  9. Thomas J. Sargent & Riccardo Colacito & Lars P. Hansen & Timothy Cogley, 2008. "Robustness and US Monetary," 2008 Meeting Papers 228, Society for Economic Dynamics.
  10. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
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  12. Jennie Bai & Thomas Philippon & Alexi Savov, 2013. "Have Financial Markets Become More Informative?," NBER Working Papers 19728, National Bureau of Economic Research, Inc.
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