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In search of economic reality under the veil of financial markets

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  • 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.

Suggested Citation

  • Josef Falkinger, 2014. "In search of economic reality under the veil of financial markets," ECON - Working Papers 154, Department of Economics - University of Zurich.
    • Handle: RePEc:zur:econwp:154
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    File URL: http://www.econ.uzh.ch/static/wp/econwp154.pdf
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    References listed on IDEAS

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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.

    More about this item

    Keywords

    Real and financial economics; incomplete knowledge; risk and uncertainty; financial crisis; size of financial sector; responsible finance;

    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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