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In search of economic reality under the veil of financial markets


Falkinger, Josef (2014). In search of economic reality under the veil of financial markets. Working paper series / Department of Economics 154, 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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D53, D83, G01, G21, B41
Uncontrolled Keywords:Real and financial economics, incomplete knowledge, risk and uncertainty, financial crisis, size of financial sector, responsible finance
Language:English
Date:April 2014
Deposited On:16 Apr 2014 14:55
Last Modified:05 Apr 2016 17:50
Series Name:Working paper series / Department of Economics
Number of Pages:53
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp154.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php
Permanent URL: https://doi.org/10.5167/uzh-95370

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