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Kiel Institute for World Economics 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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