In Search of Economic Reality Under the Veil of Financial Markets

University of Zurich, Department of Economics, Working Paper No. 154

54 Pages Posted: 18 Apr 2014

See all articles by Josef Falkinger

Josef Falkinger

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: April 15, 2014

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.

Keywords: Real and financial economics, incomplete knowledge, risk and uncertainty, financial crisis, size of financial sector, responsible finance

JEL Classification: D53, D83, G01, G21, B41

Suggested Citation

Falkinger, Josef, In Search of Economic Reality Under the Veil of Financial Markets (April 15, 2014). University of Zurich, Department of Economics, Working Paper No. 154, Available at SSRN: https://ssrn.com/abstract=2425678 or http://dx.doi.org/10.2139/ssrn.2425678

Josef Falkinger (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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