Kiel Working Papers, Kiel Institute for World Economics
No 1503:
Information, heterogeneity and market incompleteness
Liam Graham and Stephen Wright
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; (follow links to similar papers)
JEL-Codes: D52,; D84,; E32; (follow links to similar papers)
44 pages, March 2009
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