Working Paper

Information, heterogeneity and market incompleteness

Authors

  • Graham
  • L.
  • Wright
  • S.
Publication Date

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.

Info

JEL Classification
D52, D84, E32

Key Words

  • dynamic general equilibrium
  • higher order expectations
  • imperfect information
  • Kalman filter