In search of economic reality under the veil of financial markets

Josef Falkinger

No 154, ECON - Working Papers from Department of Economics - University of Zurich

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.

Keywords: Real and financial economics; incomplete knowledge; risk and uncertainty; financial crisis; size of financial sector; responsible finance (search for similar items in EconPapers)
JEL-codes: B41 D53 D83 G01 G21 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-cfn, nep-cta, nep-dge and nep-hme
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:154

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