Information, heterogeneity and market incompleteness

Liam Graham and Stephen Wright

No 1503, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: 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.

Keywords: Imperfect information; higher order expectations; Kalman Filter; dynamic general equilibrium (search for similar items in EconPapers)
JEL-codes: D52 D84 E32 (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Information, heterogeneity and market incompleteness (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1503

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