When Can Decision Makers Learn from Financial Market Prices?

Christoph Siemroth

Journal of Money, Credit and Banking, 2021, vol. 53, issue 6, 1523-1552

Abstract: I analyze a general setting where a policymaker needs information that financial market traders have in order to implement optimal policy, and prices can potentially reveal this information. Policy decisions, in turn, affect asset values. I derive a condition for the existence of fully revealing equilibria in competitive financial markets, which identifies all situations where learning from prices for policy purposes works. I discuss the possibility of using market information for banking supervision and central banking, and the general problem of asset design. I also demonstrate that some corporate prediction markets are ill‐designed, and show how to fix it.

Date: 2021
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https://doi.org/10.1111/jmcb.12799

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:53:y:2021:i:6:p:1523-1552

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