Information, heterogeneity and market incompleteness

Liam Graham and Stephen Wright

Journal of Monetary Economics, 2010, vol. 57, issue 2, 164-174

Abstract: Information is "market-consistent" if agents only use market prices to infer the underlying states of the economy. This paper applies this concept to a stochastic growth model with incomplete markets and heterogeneous agents. The economy with market-consistent information can never replicate the full information equilibrium, and there are substantial differences in impulse responses to aggregate productivity shocks. These results are robust to the introduction of a noisy public signal and aggregate financial markets. We argue that the principle of market-consistent information should be applied to any model with incomplete markets.

Keywords: Imperfect; information; Higher; order; expectations; Kalman; filter; Dynamic; general; equilibrium (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (34)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:57:y:2010:i:2:p:164-174

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