Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
966627 | Journal of Monetary Economics | 2010 | 11 Pages |
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.
Related Topics
Social Sciences and Humanities
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Economics and Econometrics
Authors
Liam Graham, Stephen Wright,